The Union Cabinet chaired by the Prime Minister Shri Narendra Modi has given approval for the proposal to provide a two year extension with amendments to the 'Framework on Currency Swap Arrangement for SAARC Member Countries' upto November 14, 2017, and extension thereafter, if necessary, by Finance Minister.

Under the facility, RBI offers swaps of varying sizes to each SAARC Member countries (Afghanistan, Bangladesh, Bhutan, Maldives, Nepal, Pakistan and Sri Lanka) depending on their two months import requirement and not exceeding US$ 2 billion in total, in USD, Euro or INR.

In the 27th SAARC FINANCE Group Meeting held in Washington D.C on 9th October 2013, the Central Bank Governors of the SAARC Member Nations approved certain amendments made to the Framework based on the experience gained from operationalizing the Framework and with the intention to bring more clarity on the clauses of the Framework.

After approval of the Cabinet, RBI will negotiate the operational details bilaterally with Central Banks of the respective SAARC countries. These bilateral agreements would be signed by RBI after obtaining prior Government approval. Any amendment to the Framework will require prior approval of Finance Minister.

The Framework on Currency Swap Arrangement for SAARC member countries has enabled India to strengthen its ties with the SAARC countries. The arrangement will further financial stability in the region, besides improving the standing and credibility of India among the SAARC countries. The extension of currency Swap facility to SAARC countries will strengthen regional integration and inter-dependence and also enhance India's economic influence in the region.

Merely extending the validity of the Framework Arrangement has no financial implications. If any bilateral Swap Arrangement is signed, then, in the event of a draw down by either party/parties, the foreign exchange reserves with RBI would be temporarily depleted upto a maximum amount of 2 billion USD. Interest would be paid by the Receiving Party on the USD/Euro/INR amount although no interest will be received on the domestic currency given in exchange thereof to the Providing Party.

Background:

The "Framework on Currency Swap Arrangement for SAARC Member Countries" was approved by the Government of India on March 1st, 2012. The Framework was formulated with the intention to provide a line of funding for short term foreign exchange requirements or to meet balance of payments crises till longer term arrangements are made or the issue is resolved in the short-term itself.

Currency swap framework extension permits bilateral swap agreements with SAARC nations, enabling negotiated drawdowns and temporary reserve support. Extension of the Framework on Currency Swap Arrangement authorises the RBI to offer bilateral currency swaps to SAARC central banks sized to cover short-term import needs in USD, Euro or INR, subject to an aggregate ceiling. Amendments clarifying operational clauses were approved and any Framework modification requires Finance Minister approval. Bilateral agreements will be executed by RBI after government clearance. Extension alone has no fiscal impact, but drawdowns under bilateral swaps would temporarily deplete RBI foreign exchange reserves up to the agreed maximum and impose an interest obligation on the Receiving Party.