India launches new Saarc currency swap framework for 2024-27

India has introduced a new currency swap window for South Asian Association for Regional Cooperation (Saarc) countries for the period 2024 to 2027.

The Reserve Bank of India (RBI) in a notification announced the new swap framework, offering various concessions.

"Under the Framework for 2024-27, a separate INR Swap Window has been introduced with various concessions for swap support in Indian Rupee. The total corpus of the Rupee support is Rs250 billion," the RBI stated.

Furthermore, the RBI plans to maintain swap agreements in US Dollars and Euros through a dedicated US Dollar/Euro Swap Window worth $2 billion, it said.

The Indian central bank will enter into bilateral exchange agreements with those Saarc central banks, which wish to avail currency exchange or swap facilities. Saarc consists of Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.

In reaction, Bangladeshi bankers and businessmen have said Bangladesh can now access dollars through India's swap system. They said using swaps to pay this large import bill during foreign exchange crises could be advantageous for Bangladesh.

Md Mezbaul Haque, spokesperson of the Bangladesh Bank, told The Business Standard that currency swap is a widely recognised method in the global money market. 

"Following the geopolitical shifts post the conflict involving Russia, major powers are reconsidering their strategies and are exploring alternative trading opportunities with their partners, including initiatives by countries like India and China," he said. 

He further said whether Bangladesh will participate in this initiative of India is a matter of review. 

"Although India is a major trading partner of Bangladesh, there is a large trade deficit. Therefore, after analysing the overall situation, the Bangladesh Bank will take the appropriate action in the interest of the country," he added.

India is Bangladesh's second-largest trading partner, with about $14 billion worth of goods imported from India annually, while exports to India are less than $2 billion. 

Ali Reza Iftekhar, managing director of Eastern Bank, told TBS that if a currency swap is necessary, it should ideally be done in dollars because dollars can be exchanged with any country, whereas rupees can only be exchanged with India.

He further stated that if the cost of swapping dollars is slightly higher, it can be accepted for now because there is a current need for dollars. 

The Saarc Currency Exchange Facility started on 15 November 2012, aiming to help member countries with short-term foreign exchange needs or balance of payments crises until long-term solutions are in place.

How currency swap works

Currency swaps enable parties to access foreign currencies without direct borrowing, effectively managing currency fluctuation risks. 

For instance, Bangladesh might provide Tk1,000 crore and receive Rs750 crore in return. These currencies are exchanged for an agreed period, with terms specifying the interest rates to be paid by Bangladesh in rupees and India in taka. 

Interest rates can reach up to 14% for rupees and up to 8% for dollars or euros, with rates for other currencies to be negotiated accordingly.

The agreement outlines where Bangladesh and India can utilise their respective currencies. 

Bangladesh can use rupees, dollars, or euros received from India to pay import duties or fund state development projects. Similarly, India can settle import obligations using Bangladeshi currency or invest in Bangladesh's government treasury bills or bonds. 

Moreover, Indian rupees can be used to purchase Bangladesh Treasury Bills, Bonds, or other investments through Sonali Bank branches in India. Likewise, Bangladesh can choose to buy Indian goods with received rupees instead of using swaps, or allocate them for other purposes as needed.

A former top official of the Bangladesh Bank explained that a swap is a direct currency exchange system where the exchanged currency can be freely used by the respective countries. 

For instance, if Bangladesh provided dollars to Sri Lanka through swaps. India has engaged in similar transactions with Sri Lanka, Maldives, and Bhutan in the past, he said.

Abdul Matlub Ahmad, president of India-Bangladesh Chamber of Commerce and Industry, said the swap system would facilitate trade starting in rupees, particularly small importers in Bangladesh who lack their own dollar income. 

He also said the India-Bangladesh Chamber would urge the government to consider participating in this swap system.