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CURRENCY SWAP

  • February 7, 2021
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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CURRENCY SWAP

Subject: Economics

Context: The Central Bank of Sri Lanka (CBSL) settled a $400 million currency swap facility from the Reserve Bank (RBI) of India last week, meeting the terms that the two countries had agreed upon.

Concept:

  • A currency swap is a transaction in which two parties exchange an equivalent amount of money with each other but in different currencies.
  • The parties are essentially loaning each other money and will repay the amounts at a specified date and exchange rate.
  • The purpose could be to hedge exposure to exchange-rate risk, to speculate on the direction of a currency, or to reduce the cost of borrowing in a foreign currency.
  • In such arrangements no third country currency is involved, thereby eliminating the need to worry about exchange variations.
  • The currency swap agreement will also bring down the cost of capital for Indian entities while accessing the foreign capital market.
  • The swap arrangement should aid in bringing greater stability to foreign exchange and capital markets .
CURRENCY SWAP economics

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