India agrees for $400 million currency swap facility for Sri Lanka

India and Sri Lanka on Friday agreed for $ 400 million currency swap agreement. The agreement signed by India's central bank Reserve Bank of India (RBI) extends the swap facility for Sri Lanka till Nov 2022.

The development comes as a relief to Sri Lanka amidst COVID and will help in its post-pandemic economic recovery.

A currency swap is a transaction in which two parties exchange principal and interest in different currencies. Companies doing business abroad often use currency swaps to get more favourable loan rates in the local currency than if they borrowed money from a local bank.

Example, if Sri Lanka borrows $1.34 (Rs 100) from India and told India that it will repay $1.34 (Rs 100) in Indian currency but Interest in dollars or vice versa Sri Lanka borrows Indian $1.34 (Rs 100) from India and gave back the main amount in dollars and repaid interest in INR. Both parties benefit by hedging against interest rates.

Both countries are currently engaged in debt repayment rescheduling talks. On 22nd, the last round to technical discussion was held on the rescheduling of bilateral debt repayment by Sri Lanka. The Indian delegation comprising of senior officials from the Ministry of External Affairs (MEA), Ministry of Finance, and the EXIM Bank interacted with representatives from the Department of External Resources of Sri Lanka through a video conference.

A release from the Indian mission in Sri Lanka said, "The next round of technical discussions between the two sides on the rescheduling of debt repayment is expected to be held soon."

The Sri Lankan President Gotabaya Rajapaksa had spoken to Indian Prime Minister Narendra Modi on May 23 in which the former requested Indian govt to provide USD 1.1 billion special SWAP facility to top up USD 400 million under SAARC facility amidst the COVID pandemic.