WHAT?

A currency swap involves two parties exchanging a specified amount of one currency for another at an agreed exchange rate, with a commitment to reverse the transaction at a future date, often at the same rate plus interest.

Currency swap agreements are financial arrangements between two central banks or monetary authorities to exchange their respective currencies up to a pre-agreed amount, typically to provide liquidity, stabilize exchange rates, or support trade and investment. 

Swaps are typically short-term (e.g., 3-5 years) and can be renewed. They differ from loans as they involve an exchange rather than a direct transfer, with terms designed to minimize currency fluctuation risks.

PURPOSE BEHIND THE SWAP

1. Liquidity Support: Provides access to foreign currency to stabilize domestic financial systems during crises (e.g., dollar shortages).
2. Trade Facilitation: Enables payments in local currencies, reducing reliance on third-party currencies like the U.S. dollar.
3. Reserve Management: Bolsters foreign exchange reserves without depleting cash holdings.
4. Geopolitical Strategy: Signals trust and strengthens financial ties between nations.

India's Recent Currency Swap Agreements

India has actively pursued bilateral currency swap agreements to enhance financial stability, support regional trade, and reduce dependence on the U.S. dollar, aligning with global trends toward de-dollarization. Below are key examples from recent developments:

1. India-Japan Bilateral Swap Arrangement (BSA): On February 28, 2025, the Reserve Bank of India (RBI) and the Bank of Japan renewed a $75 billion bilateral currency swap agreement, unchanged in size from its previous iteration. This two-way arrangement allows India and Japan to swap their local currencies (Indian Rupee and Japanese Yen) for U.S. dollars.
2. India-Maldives Currency Swap Agreement: On October 7, 2024, the RBI signed a $757 million agreement with the Maldives Monetary Authority under the SAARC Currency Swap Framework (2024-27). It includes $400 million under a USD/Euro window and ₹30 billion ($357 million) under an INR window, valid until June 18, 2027. This aligns with India’s role as a regional financial supporter, especially as Maldives faces economic challenges and balances relations with India and China.
3. SAARC Currency Swap Framework: Operational since 2012, this multilateral framework allows SAARC countries (e.g., Sri Lanka, Maldives) to access up to $2 billion in swaps, with a separate ₹25,000 crore INR window for rupee-based support. It provides a regional safety net for short-term foreign exchange liquidity or balance of payments issues, strengthening South Asian economic cooperation. 

Global Context and Other Notable Swaps

1. China’s Extensive Swap Network: China has 31 active bilateral swap agreements worth 4.16 trillion yuan ($586 billion), including with Türkiye ($4.88 billion, renewed June 2025), Saudi Arabia ($7 billion, signed 2023), and Argentina ($5 billion, extended April 2025 despite U.S. opposition). These support China’s push for yuan internationalization and de-dollarization.
2. U.S. Federal Reserve Swaps: Since 2007, the Fed has maintained permanent swap lines with developed economies (e.g., Canada, UK, Japan) and extended emergency lines in 2020 to countries like Australia and Sweden, peaking at $225 billion for Japan.
3. Indonesia-China Swap: Renewed in January 2025 for five years, this agreement supports bilateral trade and currency stability.