RBI’s special dollar swap facility receives over $25 billion
According to Reserve Bank of India (RBI), over $25 billion has been collected from special concessional swap windows for deposits by non-resident Indians and overseas foreign currency borrowings by banks.
The swap windows for Foreign Currency Non-Resident (Bank) FCNR (B) deposits and overseas borrowings by banks was introduced by the central bank on September 4, 2013 after the rupee plunged about 30% against the dollar between April and August 2013. The facility is open till November 30, 2013. The special facility allows banks to swap fresh FCNR (B) dollar funds, mobilised for a minimum period of 3 years, at a fixed rate of 3.5% per annum.
The RBI also permitted banks to borrow up to 100% of their tier-I capital from overseas, which can be swapped with the central bank at a concessional rate of 100 basis points below the rate existing in the market.
What is Currency Swap?
A currency swap is a foreign-exchange agreement between two institutions to exchange aspects (namely the principal and/or interest payments) of a loan in one currency for equivalent aspects of an equal in net present value loan in another currency.
Currency swaps are over-the-counter derivatives, and are closely related to interest rate swaps. However, unlike interest rate swaps, currency swaps can involve the exchange of the principal.
What are the main uses of Currency Swap?
Currency swaps have two key uses:
- To secure cheaper debt (by borrowing at the best available rate regardless of currency and then swapping for debt in desired currency using a back-to-back-loan).
- To hedge against (reduce exposure to) exchange rate fluctuations.
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Month: Current Affairs - November, 2013