SYLLABUS
GS-2: India and its Neighbourhood- Relations; Bilateral, Regional and Global Agreements involving India and/or affecting India’s interests.
GS-3: Indian Economy and issues relating to Planning, Mobilization of Resources.
Context: India has approved a ₹30 billion (₹3,000 crore) currency swap facility for the Maldives under the SAARC Currency Swap Framework, reinforcing its role as a key financial partner in the region.
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• The facility is being extended through the Indian Rupee (INR) swap window, as part of the broader SAARC Currency Swap Arrangement.
• This marks the first drawdown under the current framework, which was put in place by the RBI in June 2024, for the period 2024 to 2027.
- Under it, the RBI and the Maldives government signed the bilateral agreement during President Mohamed Muizzu’s State visit to New Delhi in October 2024.
• It follows the maturity of a $400 million swap facility availed by the Maldives in October 2024 under the USD/Euro window.
• The move comes amid external liquidity pressures and foreign exchange constraints faced by the Maldives economy.
What is a Currency Swap?
• A currency swap is a financial arrangement between two countries’ central banks to exchange currencies for a predefined period.
• It involves borrowing one currency in exchange for another, with an agreement to repay the original currency, along with interest, at a specified future date.
• It provides short-term foreign exchange liquidity without requiring countries to tap international capital markets.
• Such arrangements help manage the balance of payments pressures, currency volatility, and external shocks.
About the SAARC Currency Swap Arrangement
• The SAARC Currency Swap Framework is a regional financial arrangement introduced by India in 2012 to provide short-term foreign exchange liquidity support to SAARC countries.
• It allows participating countries to exchange local currency for foreign currency (USD/Euro/INR) through swap windows under pre-agreed terms.
• The framework helps countries address balance of payments pressures and avoid external borrowing shocks.
• The total corpus (for 2024–27) is $2 billion under the USD/Euro window and ₹250 billion (₹25,000 crore) under the INR window. It is available to SAARC members upon signing bilateral swap agreements.
• Under this framework, the Maldives Monetary Authority signed an agreement in October 2024 for up to $400 million under the USD/Euro window and ₹30 billion under the INR window.
Significance of the Currency Swap
• Economic Stability for Maldives: Provides immediate liquidity support, helping manage foreign exchange shortages and stabilise macroeconomic conditions.
• Strengthening Neighbourhood First Policy: It enhances bilateral trust and economic cooperation, while reinforcing India’s position as a reliable partner and “first responder” in the region.
• Regional Financial Cooperation: It demonstrates the effectiveness of SAARC mechanisms in addressing regional economic challenges and also promotes financial resilience and cooperation in South Asia.
• Strategic and Geopolitical Importance: It strengthens India’s influence in the Indian Ocean Region (IOR) and aligns with India’s broader initiatives, such as Neighbourhood First and Vision MAHASAGAR.