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RBI, Sri Lanka Central Bank Sign Currency Swap Pact

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Reserve Bank of India Currency swaps agreement with the Central Bank of Sri Lanka the pact would allow its Sri Lankan counterpart to draw up to $700 million over a maximum period of three months under a new special currency swap agreement signed by the two central banks.

  • Sri Lanka is seeking a loan of $1.5 billion from the International Monetary Fund (IMF) to boost foreign exchange reserves and help avert a balance of payments crisis.
  • The country has seen its foreign exchange reserves depleted by the central bank’s defence of its rupee currency, as it struggles with heavy debt piled up under the previous government.RBI & Sri Lanka
  • RBIhas previously provided currency swaps to the Central Bank of Sri Lanka, including plans to extend a $1.5 billion agreement by one year.

Currency Swap Pact:

  • An exchange of interest rate payments in different currencies on a pre-set notional amount and in reference to pre-determined interest rate indices in which the notional amounts are exchanged at inception of the contract and then re-exchanged at the termination of the contract at pre-set exchange rates.

Main uses:

  • To secure cheaper debt as well as to hedge against (reduce exposure to) exchange rate fluctuations.
  • To defend against financial turmoil by allowing a country beset by a Liquidity crisis to borrow money from others with its own currency.

Central Bank of Sri Lanka:

  • Headquarters: Colombo
  • Founded: 1950
  • Currency: Sri Lankan Rupee