Currency Swap Agreements

Economics


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 08-Oct-2024

Why in the News?

The Reserve Bank of India (RBI) signed a currency swap agreement with the Maldives Monetary Authority under the SAARC framework for 2024-2027. The agreement finalized in New Delhi, will enable the Maldives to access $400 million through the US Dollar/Euro Swap Window and ₹30 billion under the Indian Rupee Swap Window.

PM Modi and President Muizzu, pledge to strengthen India-Maldives cooperation.

About Currency Swap Agreements

  • It is an agreement in which two parties agree to exchange two currencies at a predetermined rate and then re-exchange those currencies at an agreed rate on a specified future date.
  • These agreements are often used to hedge against currency exchange rate risks or secure more favorable financing in foreign currencies.

How do Currency Swap Agreements Work?

  • Two parties exchange principal and interest payments on loans in different currencies.
  • One party typically borrows in its domestic currency and lends in the foreign currency, while the other party does the opposite.
  • The terms and exchange rates are established at the start of the contract.

Benefits

  • Hedging: Protects against fluctuations in exchange rates, reducing currency risk exposure.
  • Cost-effective Financing: Provides access to cheaper financing in foreign currencies compared to domestic options.
  • Efficient Cash Flow Management: Enables better cash flow management for multinational corporations operating across various countries.
  • Supports International Trade: Offers certainty in exchange rates for a specified period, facilitating international trade.

Users Currency Swap Agreements

  • Multinational Corporations
  • Financial Institutions
  • Governments

Risks Associated

  • Exchange Rate Risk
  • Credit Risk
  • Regulatory Risk
  • Liquidity Risk

    About Maldives

    • Capital: Malé
    • Currency: Maldivian Rufiyaa (MVR)
    • Political System: Presidential republic
    • Location: The Maldives is an island nation located in the Indian Ocean, southwest of Sri Lanka and India.
    • Key Economic Activity: Tourism is the primary economic activity, followed by fishing and agriculture.
    • International Organization Membership: Maldives is a member of the United Nations (UN), the South Asian Association for Regional Cooperation (SAARC), and the Commonwealth of Nations.

    Map of Maldives