Currency swap arrangement

Also called: Bilateral swap line, Central bank swap line · Topic: Balance of Payments and Exchange Rates · NCERT: Beyond NCERT

Meaning

A currency swap arrangement is an agreement between two central banks. Under it, each gives the other its own currency for a fixed period. At the end, they swap the money back at the rate agreed at the start. It gives a country quick access to foreign currency, usually dollars, when its markets are under stress or it has a short-term cash need.

It matters because a country can get extra foreign money without spending its own forex reserves or going to the IMF. For India, swap lines are the third line of defence after its own reserves and the RBI's USD/INR buy-sell swaps.

Explanation

How a swap works

• Step 1 (start): Central bank A gives its own currency to central bank B. B gives A foreign currency, usually dollars, in return.
• Step 2 (use): A uses the dollars to pay for imports, repay foreign debt or sell dollars in the market to support its currency.
• Step 3 (end): After the agreed period, both sides return the money at the same agreed rate. The borrowing side usually pays a small interest cost.
• Key feature: an arrangement that has not been drawn is a promise of access. It is not money in hand. So an undrawn swap line is not counted in forex reserves. Reserves have only four parts: FCA, gold, SDRs and the reserve tranche position.
• A "rollover" means the swap is renewed for another period when it falls due, so the borrower keeps the money longer.

Types of swap arrangements

• Bilateral swap line: an agreement between two central banks. Example: the India-Japan Bilateral Swap Arrangement (BSA) of US$75 bn [2].
• Regional or multilateral framework: one central bank offers swaps to a group of countries under common rules. Example: the SAARC Currency Swap Framework, where India is the provider to Sri Lanka, the Maldives and Bhutan.
• Local-currency swap: the two countries exchange their own currencies to support trade and liquidity, so they depend less on the dollar. Example: the RBI-UAE arrangements.
• Provider vs user: the same country can be on both sides. India receives support under the Japan BSA and gives support under the SAARC framework.

How it steadies the currency during stress

• Chain of events in a crisis:
• Foreign investors pull money out → demand for dollars rises → the rupee falls fast
• The RBI draws dollars under a swap line → it sells those dollars in the market

• The rupee steadies, and the RBI's own reserves are not run down as fast

• Confidence effect: often the line does not even need to be used. Markets know the backup exists, so panic is less likely. This is why swap lines work like insurance.

• What decides how useful a line is: its size, the currency it gives (dollars are most useful), how fast money can be drawn, and whether it is renewed on time.

Worked example

• India's forex reserves were US$691.11 bn (31 March 2026) [1].
• On top of this, India can swap rupees for up to US$75 bn under the Japan BSA [2].
• Total foreign currency India could use in a crisis ≈ 691.11 + 75 = about US$766 bn.
• So the swap line adds a backup of about 11% (75 ÷ 691.11) over the reserves India already holds.
• India also does not pay negative carry (the gap between what reserves earn and what India pays on its own borrowing) on the undrawn US$75 bn, because it is not holding that money.

In India

• Who manages it: the RBI signs and runs swap arrangements with foreign central banks. The Union Cabinet approves major agreements.
• India-Japan BSA (India as user):
• Raised to US$75 bn from the earlier US$50 bn [2].
• Negotiated during the PM's visit to Tokyo on 29 October 2018. The Cabinet approved it on 10 January 2019, and it came into force on 28 February 2019 [2].
• Renewed in March 2022 [3].

• Purpose: India can swap rupees for up to US$75 bn to keep the BoP (balance of payments, the record of all money flows between India and the rest of the world) stable or to meet short-term liquidity needs [2].

• SAARC Currency Swap Framework (India as provider):

• The 2024-27 framework was announced on 27 June 2024. It added a separate INR Swap Window with concessions for swaps in rupees [5].
• Recent use:
  • Bhutan's Royal Monetary Authority rolled over ₹15 billion (26 February 2026) and drew ₹25 billion more (23 March 2026) [1].
  • The Maldives Monetary Authority rolled over US$400 mn (23 October 2025) [1].

• In Sri Lanka's 2022 crisis, reserves ran out and the country defaulted. India gave support, including through the SAARC swap.

• RBI-UAE arrangements: these include a local-currency swap that supports trade in the two countries' own currencies.

• Where it sits in India's lines of defence: 1. Own reserves 2. RBI USD/INR buy-sell swaps 3. Currency swap arrangements 4. The IMF as lender of last resort

Don't confuse with

• RBI USD/INR buy-sell swap: this is a deal between the RBI and banks in India, used to add or remove rupee liquidity and build forward cover. A currency swap arrangement is between two central banks and brings in foreign money from outside.
• FCNR(B) swap window (2013): this let Indian banks swap NRI dollar deposits with the RBI at a fixed cost of 3.5% a year [4]. It brought NRI money into the country. It was not a line from a foreign central bank.
• Reserve tranche position (RTP): this is India's own money at the IMF and is counted in forex reserves (US$4.81 bn, 31 March 2026) [1]. An undrawn swap line is not counted in reserves.
• IMF loan: an IMF loan is the last line of defence and usually comes with policy conditions, as in 1991. A swap line is a quicker bilateral backup that does not come with IMF-style reform conditions.

Prelims Hooks

• India-Japan BSA = US$75 bn, raised from US$50 bn, in force since 28 February 2019 [2] and renewed in March 2022 [3].
• SAARC Currency Swap Framework: India is the provider (lender), not a borrower. The 2024-27 framework added an INR Swap Window [5].
• Trap: a swap line is not one of the four parts of forex reserves (FCA > Gold > SDR > RTP) [1].
• Recent SAARC use: Bhutan (₹15 bn rolled over and ₹25 bn more drawn, 2026) and Maldives (US$400 mn rolled over, October 2025) [1].
• The swap is reversed at the end at the rate agreed at the start. It is a temporary exchange, not a grant or a sale of currency.
• Order of India's defences: own reserves → RBI buy-sell swaps → central bank swap lines → IMF.

Mains Points

• Cheap insurance compared with holding more reserves:
• Holding reserves costs money: about 3% a year of negative carry, plus the interest cost of sterilisation (mopping up the extra rupees the RBI creates when it buys dollars).
• A swap line gives backup dollars only when needed. This supports the argument for an "optimal" level of reserves rather than "the more the better".

• Limits: a line depends on the partner's goodwill and on timely renewal. It is not fully under India's control the way its own reserves are.

• Financial diplomacy and a regional safety net (GS-II link):

• India's support to Sri Lanka, the Maldives and Bhutan under the SAARC framework builds a regional safety net outside the IMF.

• It supports the Neighbourhood First policy and builds India's influence as a regional lender.

• Rupee internationalisation:

• The INR Swap Window (2024-27) [5] and the RBI-UAE local-currency swap push more trade and lending in rupees.
• This lowers dependence on the dollar and lowers the exchange-rate risk from sudden stops.

Related concepts

• Foreign exchange reserves
• Gold reserves
• Import cover
• Hot money
• Sudden stop
• Capital flight

Read more

• Forex reserves, RBI intervention and capital-flow volatility