Union Cabinet approves India-UAE currency swap agreement

The Union Cabinet has given its ex-post facto approval for the Memorandum of Understanding (MoU) between Reserve Bank of India (RBI) and Central Bank of United Arab Emirates (UAE) on co-operation concerning currency swap agreement.
Decision in this regard was taken at the Union Cabinet Meeting chaired by Prime Minister Narendra Modi in New Delhi. The Agreement was signed in February, 2016 during the official state visit of Crown Prince of Abu Dhabi Sheikh Mohammed Bin Zayed Al Nahyan to India.
Key facts

• The MoU commits that RBI and Central Bank of UAE will consider signing a bilateral Currency Swap Agreement on mutually agreed terms and conditions.
• The agreement will be signed after undertaking technical deliberations, subject to the concurrence of respective Governments.
• The MoU will help to further strengthen the close economic cooperation and relationship between India and UAE.
• The swap agreement is also expected to facilitate invoicing of bilateral trade in local currencies.

What is a Currency Swap?

• A currency swap involves exchange of principal and interest in one currency for the same in another currency. It is considered to be a foreign exchange transaction.
• For example: Suppose a US based company needs to acquire Indian Rupees and India-based company needs to acquire US dollars.
• Then these two companies could arrange to swap currencies by establishing an interest rate, agreed upon amount along with a common maturity date for the exchange.

Month: Current Affairs - May, 2016