CURRENCY SWAP ARRANGEMENT (Syllabus: GS Paper 3 – Economy)

Context: The Reserve Bank of India (RBI), in collaboration with the Government of India, has announced a revised Framework on Currency Swap Arrangement for SAARC countries, effective from 2024 to 2027.

Currency Swap Arrangement

• Definition: A currency swap involves two parties exchanging equivalent amounts in different currencies, essentially acting as a loan repayment in differing currencies.
• Contractual Agreement: It is a contractual agreement between two parties to exchange financial instruments or cashflows over a specified period, typically based on a notional principal amount.
• Purpose: Currency swaps are used to manage currency risk, hedge against exchange rate fluctuations, or access lower interest rates in different markets.
• Mechanics and Settlement: Parties agree on the notional amount, currencies involved, exchange rate, and maturity date. Settlement occurs at the end of the swap period based on the agreed terms.

South Asian Association for Regional Cooperation (SAARC)

• Establishment: The South Asian Association for Regional Cooperation (SAARC) was established with the signing of the SAARC Charter in Dhaka on 8 December 1985.
• Regional Cooperation: The idea of regional cooperation in South Asia was first raised in November 1980, leading to the inaugural meeting of the foreign secretaries of the seven founding countries in Colombo in April 1981.
• Membership: Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri-Lanka.
• Expansion of Membership: Afghanistan joined SAARC as its newest member.
• Headquarters: Kathmandu, Nepal.
• Objectives: SAARC's objectives include promoting welfare, economic growth, collective self-reliance, mutual trust, collaboration, and cooperation with other developing countries and international organizations.
• Principles of Cooperation: SAARC is grounded on principles like sovereign equality, territorial integrity, non-interference, and mutual benefit, outlined in its charter.
• Areas of Cooperation: SAARC's areas of cooperation span diverse sectors such as human resource development, agriculture, environment, trade, social affairs, energy, education, and security.