India activates currency swap to help the Maldives amid COVID-19

Continuing its support to the Maldives in times of COVID-19 crisis, New Delhi has activated a currency swap arrangement to help the Indian Ocean Island country to mitigate the impact of COVID crisis. The move is expected to help Maldive's financial system by stabilizing the exchange rate and ease liquidity.

India has given a foreign currency swap facility of $ 150 million to the Maldives Central Bank--Maldives Monetary Authority-- under the USD 400 million currency swap agreement signed in July 2019 between the two countries.

A currency swap is a transaction in which two parties exchange principal and interest in different currencies.

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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, the Maldives borrow 100 Rs From India and told India that it will repay 100 Rs in INR but the Interest in Maldivian rufiyaa or vice versa the Maldives borrow Rs 100 from India and gave back the principal amount in Maldivian rufiyaa and repaid interest in INR. Both parties benefit by hedging against interest rates.

The decision to activate the currency swap arrangement comes a week Indian PM Modi and Maldives President Solih spoke. The $ 400 million currency swap facility is a part of the $ 1.4 billion the economic package announced by India for the Maldives in December 2018 during the State Visit of President Ibrahim Mohamed Solih. That was the first visit of Maldives President to India after being elected in November of that year.

Indian govt is also considering extending the validity of the currency swap facility by one year. Maldives is the only SAARC country other than Bhutan, which has been extended USD 400 million currency swap facility.