The Reserve Bank of India will offer Swap Arrangement of US $ 2 billion both in foreign currency and Indian rupee to member countries of the South Asian Association of Regional Co-operation (SAARC).
RBI Governor Dr Duvvuri Subbarao announced this arrangement at the 24th SAARC FINANCE Governors’ Meeting, in Pokhara, Nepal, today.
This swap arrangement is expected to strengthen regional financial and economic cooperation in South Asia.
The Swap Arrangement is intended to provide a back stop line of funding for the SAARC member countries to meet any balance of payments and liquidity crises, till longer term arrangements are made, or if there is a need for short-term liquidity due to market turbulence.
With launching of this facility, member countries — Afghanistan, Bangladesh, Bhutan, Maldives, Nepal, Pakistan and Sri Lanka — can now approach the Indian central bank for availing of the facility.
The SAARC Swap Arrangement will have a corpus of US$ 2 billion. India will contribute the entire fund. The swap amount available to various member central banks has been arrived at broadly based on two months’ import cover subject to a floor of US$ 100 million and a maximum of US$ 400 million per country.
The swap will be offered in US dollar, Euro or Indian Rupee against the domestic currency or domestic currency-denominated government securities of the requesting country.
Under the facility, the requesting member countries can make drawals of US dollar, Euro or Indian Rupee in multiple tranches.
Each drawal is of three months tenor and can be rolled over twice. The first rollover will be at the normal rate of interest, while the second one attracts 50 bps interest more than the normal interest rate.
For this purpose, the normal interest rate agreed upon is the LIBOR (for three months) plus 200 basis points. The normal interest rate for INR swap is RBI Repo Rate minus 200 basis points.
For availing of the facility, the central banks of requesting countries will need to enter bilateral swap agreements, which need final approval from the Government of India. The Reserve Bank’s proposal to offer swap facility to SAARC member countries had earlier been approved by Prime Minister Manmohan Singh’s cabinet.