RBI to set up $2 billion swap facility for SAARC nations

It is expected to deepen economic co-operation

The Reserve Bank's proposal to offer swap facility to SAARC member-countries had already been approved by the Union Cabinet. Photo: P.V. Sivakumar

In a bid to beef up regional co-operation in economic and financial spheres, the Reserve Bank of India (RBI) has decided to set up a $2 billion swap facility for SAARC (South-Asian Association for Regional Co-operation) member-nations. This facility will be available in foreign currency and Indian rupee.

The swap will be offered in U.S. dollar, euro or Indian rupee against the domestic currency or domestic currency-denominated government securities of the requesting country.

The swap amount available to various member-central banks is arrived at broadly based on two months import cover, subject to a floor of $100 million and a maximum of $400 million per country.

Under the facility, the requesting member-countries can make drawals in dollar, euro or Indian rupee in multiple tranches. Each drawal is of three months tenor and can be rolled over twice. The first roll-over will be at the normal rate of interest.

The second one, however, will attract 50 basis points 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 Indian rupee swap is RBI Repo Rate minus 200 basis points, says an RBI release. “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 release says. The Reserve Bank's proposal to offer swap facility to SAARC member-countries had already 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 move for a SAARC swap facility follows a decision taken by the SAARC Finance Ministers at the Ministerial Meeting on Global Financial Crisis held on February 28, 2009.

The swap facility is expected to deepen economic co-operation within the SAARC region and pave the way for an increased intra-regional trade.