RBI to extend $400 million Currency Swap Facility to Sri Lanka

Published: July 25, 2020

The Reserve Bank of India has signed all the necessary documents for extending a $400 million currency swap facility to Sri Lanka to boost the island nation’s draining foreign exchange reserves on account of the coronavirus pandemic around the world.

This agreement will remain available till November 2022

In April 2020, RBI said in a statement that it was ready to enter into an agreement with the Reserve Bank of India (RBI) for a currency swap worth $400 million under the South Asian Association for Regional Cooperation (SAARC) framework to boost the foreign reserves and ensure the financial stability of the island nation severely affected by the pandemic.

What is a Currency Swap Agreement?

It is a kind of agreement in which two parties exchange the principal amount of a loan and the interest in one currency for the principal and interest in another currency. The equivalent principal amounts are exchanged at the spot rate at the beginning of this agreement and during the currency of the agreement; each party pays the interest of the swapped principal loan amount.

This is mainly used to obtain foreign currency loans at a better interest rate than a company could obtain by borrowing from a foreign market.

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