RBI signs $400 mn currency swap facility for Sri Lanka

RBI signs $400 mn currency swap facility for Sri Lanka

• The Reserve Bank of India has agreed to a $400 million currency swap facility for Sri Lanka till November 2022, the Indian High Commission tweeted
• The Central Bank of Sri Lanka had sought the swap facility to help bolster the pandemic hit island nations' foreign exchange reserves. The RBI’s action comes in the wake of a recent bilateral‘technical discussion’ on rescheduling Colombo’s outstanding debt to India.
•  As u all know that India' forex reserve position is good and it has crossed $500 billion (It has mainly Dollars but also consists of Euro, Yen, etc. currencies which are internationally acceptable)
• Sri Lanka's currency called 'Sri Lanka Rupee' has depreciated in terms of dollars and has crossed, $1 = 185 Sri Lankan Rupee. And 'Sri Lankan Currency' is feeling pressure on the downward side (means the chances are it may depreciate further) because of the Covid-19 crisis.  And Sri Lanka's forex position is also week (its forex reserve is low).
• Now in such a situation, if Sri Lanka buys dollars from the market (for its international trade/import purpose) then its rupee will further depreciate which may not be good for the country. So, Sri Lanka planned for OUT OF MARKET TRANSACTION.  Sri Lanka (through its Central Bank) asked for Dollars/Euros from India (through its Central Bank/RBI) worth $400 million (as India has enough forex reserves) and in return, India will get 'Sri Lankan Rupee' at the present/spot rate of $1= 185 Sri Lankan Rupee. This will boost Sri Lanka's Forex reserve and since it's an out of the market transaction, it will not lead to depreciation of Sri Lankan Rupee. TRY TO UNDERSTAND that if Sri Lanka sells its rupee in the market and tries to purchase dollars then demand of dollar will increase and Sri Lankan Rupee will further depreciate. 
• India can use the 'Sri Lankan Rupee' for its import purpose for importing goods from Sri Lanka. (Try to understand that, in this swap facility, it will not be reversed i.e. India will not get back its dollars in future and India will not have to pay Sri Lank the Sri Lankan currency. THERE are certain other swaps which u may have heard a company's level or between RBI and banks where the Swaps are reversed after some time)
• The Central Bank of Sri Lanka can make drawals of US Dollar or Euro in multiple tranches up to a maximum of $400 million or its equivalent till Nov 2022.
• This swap arrangement/facility will further economic co-operation between the two countries. 
• As China is already investing a lot in Sri Lanka for its strategic ambitions, India should not be behind in providing a helping had to its neighbors. This will boost strategic ties also between Sri Lanka and India.