Reserve Bank of India announces SAARC swap arrangement

With a view to strengthening regional financial and economic cooperation, Governor of Reserve Bank of India Dr. D. Subbarao on 16 May announced in the 24th SAARC FINANCE Governors’ Meeting in Pokhara, Nepal, that the Reserve Bank of India will offer Swap Arrangement of US $ 2 billion both in foreign currency and Indian rupee. The facility will be available to all SAARC member countries, viz., Afghanistan, Bangladesh, Bhutan, Maldives, Nepal, Pakistan and Sri Lanka. With launching of this facility, member countries can now approach Reserve Bank of India for availing of the facility.

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. 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.

Under the facility, the requesting member countries can make withdrawals of US dollar, Euro or Indian Rupee in multiple tranches. Each withdrawal 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 basis points (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 the Union Cabinet.

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.

The SAARC Swap facility is being offered by the Reserve Bank of India pursuant to the decision of SAARC Finance Ministers at the SAARC Ministerial Meeting on Global Financial Crisis, held on February 28, 2009, which noted that “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.”

It is expected that this swap facility will further economic cooperation within the SAARC region, pave the way for increased intra-regional trade, and contribute to enhancing our collective welfare.