Currency Swap

  • Currency swap is a temporary reciprocal currency arrangement between two central banks.
  • Under the arrangement, central banks agree to keep a supply of their country’s currency available to trade to another central bank at the current exchange rate.
  • The parties agree to swap back these quantities of their two currencies at a specified date in the future, which could be the next day or even three months later, using the same exchange rate as in the first transaction.
  • India already has a $75 billion bilateral currency swap line with Japan, which has the second highest dollar reserves after China.
  • The RBI also offers similar swap lines to central banks in the SAARC region within a total corpus of $2 billion.
Significance
  • Manage exchange rate
  • Ensure liquidity
  • A significant monetary policy tool

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