A Currency Swap is a pact between two countries that allows trading in their own currency and payments to import and export trade at pre-determined exchange rates without bringing in a third currency..
How does a Currency Swap Agreement work..??
At the start of a swap, central bank 1 sells a specified amount of currency A to central bank 2 in exchange for currency B at the prevailing market exchange rate..
Central bank 1 agrees to buy back its currency at the same exchange rate on a specified future date.. Central bank 1 then uses the currency B it has obtained through the swap to lend on to local banks or corporations..
On the specified future date that the swap unwinds and the funds are returned, central bank 1, which requested activation of the swap, pays interest to central bank 2..
While the terms of swap agreements are designed to protect both central banks involved in the swap from losses owing to fluctuations in currency values, there are some risks that a central bank may refuse, or be unable, to honor the terms of the agreement..
For this reason, lending through currency swaps is often considered to be a meaningful sign of trust between governments..
As a display of this trust between the two Governments, India and the United Arab Emirates (UAE) just signed a currency swap agreement on Tuesday the 4th December to boost trade and investment ties between the two countries..
The development came during the visit of Indian External Affairs Minister Sushma Swaraj to Abu Dhabi to take part in the ministerial meeting of the 12th session of the UAE-India Joint Commission Meeting (JCM) and held exhaustive discussions with Shaikh Abdullah Bin Zayed Al Nahyan, UAE’s minister of foreign affairs and international cooperation..
Raveesh Kumar, India’s external affairs ministry spokesperson tweeted
Advancing the Comprehensive Strategic Partnership EAM @SushmaSwaraj & Foreign Minister Shaikh Abdullah Bin Zayed Al Nahyan co-chaired 12th India-UAE #JCM. Held exhaustive discussions on cooperation in energy, security, trade, investments, space, defence & consular, among others
Through the currency swap agreement, both India and the UAE can make payments in their respective currency to boost and trade investment without the involvement of a third currency like dollar..
Clarifying the currency swap agreement Indian embassy in Abu Dhabi said the swap is for an amount of Dh2 billion or 35 billion Indian rupees, depending on the central bank which is requesting the amount..
The bilateral currency swap agreement between India and UAE is expected to reduce the dependency on hard currencies like the US dollar and this is also expected to give a push for the local currencies of the two nations and it may reduce the impact of volatility in exchange rates arising from dependency on a third currency. It is also expected to reduce the transmission costs arising from exchange rate risk.
Currently there are strong economic and trade ties between India and the UAE with bilateral trade standing at $52 billion (Dh190.8 billion) in 2017, with non-oil trade accounting for $34 billion.
India’s FDI into the UAE last year was $6.6 billion while the UAE’s investment in India stood at $5.8 billion.
Both the UAE and India already have currency swap agreements with major exporting countries, including China, Japan and South Korea. India has been focusing on stabilising its balance of payments positions by entering into currency swap agreements with many of its export countries, especially with oil-supplying countries..
Such agreements will also support to strengthen currencies, reduce risk, charges and possible losses in deals involving the various currencies involved.
You can explore the evolution of central bank currency swaps over time in detail, through this interactive map..
Interesting, isn’t it.. 🙂