The Reserve Bank of India (RBI) signed the first Currency Swap Agreement with the Royal Monetary Authority (RMA) of Bhutan for up to USD 100mn to further economic co-operation between the two countries, yesterday in New Delhi, India.
RMA can make withdrawals of US Dollar, Euro or Indian Rupee in multiple tranches up to a maximum of US$ 100mn or its equivalent.
The swap arrangement is intended to provide a backstop line of funding for the SAARC member countries to meet any balance of payments and liquidity crises till longer term arrangements are made or if there is need for short-term liquidity due to market turbulence. The arrangements will also further financial stability in the region, RBI told Indian media.
However, the commercial banks in the country are neither happy nor sad about the currency swap.
The CEO of Bhutan National Bank Kipchu Tshering said “it is all short term because this will be able to abate the situation only for a few months, till July or August.” He said the additional funds will also not help enhance their liquidity base as RMA needs to pay in Ngultrums, the equivalent of INR issued to them.
CEO of T-Bank said, his bank, as and when required shall avail INR from the RMA to be used for import payments. “It will ease the situation for a short term,” he said.
However, CEO of Druk PNB NK Arora said the currency swap has been long overdue and it is not going to ease out the liquidity issues faced by local banks anyway.
For that matter, he said the commercial banks will not get any Rupee at all from RMA. The funds he said will be used by RMA to pay off the loans availed through RBI’s overdraft facility at 10% interest rate. “It is only conversion of the high cost debt of RMA to low cost. It is not going to flow to commercial banks,” he said.
The agreement is valid for a period of three years from the date of signing.
In May 2012, RBI had announced it would offer swap facilities aggregating US$ 2bn, both in foreign currency and Indian Rupee, to SAARC member countries which include Afghanistan, Bangladesh, Bhutan, Maldives, Nepal, Pakistan and Sri Lanka.
According to the RMA Annual report the RBI on 15 November, 2012 announced calls to all SAARC member nations to apply for the bilateral Swap arrangement. “The RMA and RGOB will be entering in its first Rupee Swap arrangement with India in early 2013 for a sum of US$ 100mn (Rs 5.5bn),” says the report.
The SAARC Swap facility was offered by the RBI pursuant to the decision of SAARC Finance Ministers at the SAARC Ministerial Meeting on Global Financial Crisis held on 28 February, 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 is expected that this swap facility will further economic cooperation within the SAARC region, pave the way for increased intra-regional trade, and contribute to enhancing our collective welfare.
For availing of the facility, the central banks of requesting countries will need to enter bilateral swap agreements, which need final approval from the Government of India. The Reserve Bank’s proposal to offer swap facility to SAARC member countries had earlier been approved by the Indian Union Cabinet.
The swap amount available to various members of central banks has been arrived-at broadly based on two months import cover subject to a floor of US$ 100mn and a maximum of US$ 400mn per country.
For Rupee withdrawals, the normal interest rate is the RBI repo rate minus 2%. Repo rate is the rate at which RBI lends to banks in India.
Repayment can either be done by putting back an equivalent amount of home currency or a currency denominated government security.