RBI, Sri Lanka Central Bank Sign Currency Swap Pact

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.
• 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