Sri Lanka to benefit from RBI's USD 2 bn swap arrangement

Governor of Reserve Bank of India (RBI) D Subbarao on May 16 had announced that the RBI will offer swap arrangement of USD 2 billion both in foreign currency and Indian rupee.

The facility will be available to all South Asian Association for Regional Cooperation (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 central bank of Sri Lanka will need to enter bilateral swap agreements, which need final approval from the Government of India, the Indian High Commission said in a statement.

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.

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 USD 100 million and a maximum of USD 400 million per country.

Under the facility, the requesting member countries can make drawals of US dollar, Euro or Indian Rupee in multiple tranches. Each drawal 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 interest more than the normal interest rate.

For this purpose, the normal interest rate agreed upon is the London Interbank Offered Rate (LIBOR) for three months plus 200 basis points. The normal interest rate for Indian rupee swap is RBI Repo Rate minus 200 basis points.

The SAARC swap facility is being offered by the Reserve Bank of India in light of 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 had noted.