What is the India-US currency swap agreement?
The US Federal Reserve granted the currency swap line to RBI and other central banks. This will provide additional comfort in an event of any abrupt outflow of funds with predetermined terms and conditions. Earlier, the facility was limited to certain central banks of the world and did not include the Reserve Bank of India (RBI).
How will the currency swap agreement help India?
Amid the global pandemic, RBI expressed for a currency swap agreement with the US Federal Reserve as the pressure on Indian currency is increasing. The US Federal Reserve's grant will help India in stabilizing markets, reduce volatility and ease pressure on the Indian rupee.
As per RBI, India's foreign exchange reserves have fallen by nearly $13 billion. On March 6, India has a foreign exchange reserve of $487.23 billion which fell to $474.66 billion on April 3.
On March 19, the US Federal Reserve announced the currency swap agreements with other central banks of the world to contain the risk of the shortage of dollars in global markets. However, at the time India was excluded from the list.
What happens in the currency swap agreement?
In a currency swap agreement, the US Federal Reserve provides dollars to a foreign central bank which provides the same amount of funds in its currency. This swap is based on the market exchange rate at that time. The currencies can be swapped back later at a specified date agreed earlier with the same exchange rate when the first transaction was done.
India already has a $75 billion bilateral currency swap line with Japan having the second-highest dollar reserves after China. Similarly, RBI also offers currency swap lines in the SAARC region within a total corpus of $2 billion.
The US Fed has permanent swap agreements with the several central banks of the world. However, economic like China, Saudi Arabia, etc. (G-20 group except for India) do not have currency swap lines with the US Fed.