RBI notifies norms for currency swap window
RBI has notified norms for currency swap window. As per the notification, the swap facility will be available to scheduled commercial banks for fresh Foreign Currency Non-Resident Bank – FCNR(B) deposits mobilized for a minimum period of 3 years. It further says that the deposits raised may be in any permitted currency, but the swap would be available only in dollars. Although the swap window will be operated on a daily basis on all working days in Mumbai, a particular bank can avail of the swap facility only once in a week.
What is Currency Swap?
A currency swap is a foreign-exchange agreement between two institutions to exchange aspects (namely the principal and/or interest payments) of a loan in one currency for equivalent aspects of an equal in net present value loan in another currency.
Currency swaps are over-the-counter derivatives, and are closely related to interest rate swaps. However, unlike interest rate swaps, currency swaps can involve the exchange of the principal.
What are the main uses of Currency Swap?
Currency swaps have two main uses:
- To secure cheaper debt (by borrowing at the best available rate regardless of currency and then swapping for debt in desired currency using a back-to-back-loan).
- To hedge against (reduce exposure to) exchange rate fluctuations.