The Indian central bank, the Reserve Bank of India (RBI) is setting aside US$2 billion for a currency swap facility among South Asian Association For Regional Cooperation (Saarc) member countries.
Currency swap is a foreign exchange instrument, which involves the exchange of currencies between two entities. The $2 billion, therefore, will be exchanged between RBI and the Saarc member countries.
This arrangement came through in a meeting between Saarc central bank governors in Pokhara, Nepal this week.
Under the facility, a member country can make withdrawals of US Dollar, Euro or Indian Rupee in multiple portions, RBI governor Dr D Subbarao said.
The withdrawal will mature in three months and the payment of equivalent home currency can be done twice. The first payment will be charged a normal interest rate, which is the LIBOR rate plus two per cent.
LIBOR or London Interbank Offered Rate is the average interest rate that lending banks in London charge when lending to other banks. The LIBOR rate is the benchmark for many financial institutions around the world while fixing interest rates.
The second payment will have an additional 0.5 per cent interest rate more than the normal interest rate.
For rupee withdrawals, the normal interest rate is the RBI repo rate minus 2 per cent. Repo rate is the rate at which RBI lends to banks in India.
Repayment can either be done by putting back an equivalent amount of home currency or a currency denominated government security.
An official from the Royal Monetary Authority said that each Saarc member would be entitled a quota from the $2 billion fund.
Assuming the fund is divided equally, each member countries will get $285 million. This works out to 15 billion ngultrum ($275 million) at the present dollar rate at 54 ngultrum ($.99).
A news release from the Reserve Bank of India states that the fund it made available was based on the two months import expenditure records of each member countries. Based on that, each member country can get between $100 million and $400 million.
The swap facility is being entirely funded by India. The central bank official said that India was the biggest economy in South Asia, and most South Asian countries have huge trade integration with India.
The central bank official said it was possible for Bhutan to print Ngultrum but not foreign currencies. Therefore, the swap facility will help the economy in using foreign currencies for trade.
The central bank is however not sure whether they will be able to lift some rupee restrictions it has put in place since March. “But it’ll definitely ease pressure on the rupee demand to some extent,” the official said, adding that the demand for rupee in the economy continues to increase at a rapid pace.
The decision for a swap arrangement to meet any balance of payment or liquidity crisis was made in 2009, when foreign currency flows dried up amid the global credit crunch, following the global financial crisis.
The release also states that for availing of the facility, the central banks of requesting countries will have to enter into a bilateral swap agreements, which need final approval from the Indian government.
The swap facility has been proposed by RBI and approved by the Union cabinet recently.
The facility will be available to all Saarc member countries; Afghanistan, Bangladesh, Bhutan, Maldives, Nepal, Pakistan and Sri Lanka.
The facility is expected to strengthen regional financial and economic cooperation.
A major cause of current concern in the region is the drying up of credit and the contraction of financial markets. Mechanisms must, therefore, be developed aimed at creating bilateral arrangements in the region to address short-term liquidity difficulties and to supplement international financing arrangements, the release states.
©2012 the Asia News Network (Hamburg, Germany)
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