New Delhi: The Reserve Bank of India (RBI), in partnership with the Government of India, has introduced an updated Currency Swap Arrangement Framework for SAARC countries, effective from 2024 to 2027. Announced on June 27, 2024, this initiative aims to support short-term foreign exchange liquidity needs and address balance of payment crises within the SAARC region. The SAARC Currency Swap Facility, originally launched on November 15, 2012, is designed to provide a financial safety net for member countries.

A key feature of the new structure is the introduction of an INR Swap Window with a corpus of ₹250 billion, offering various concessions for swap assistance in Indian Rupees. Additionally, the US Dollar/Euro Swap Window, with a total corpus of US$ 2 billion, will continue to be maintained by the RBI. All SAARC member nations can access the facility, provided they accept the bilateral swap agreements.

The South Asian Association for Regional Cooperation (SAARC) comprises Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. The economic structures of these countries vary significantly, with India being the largest economy in the region at USD 3,572 billion, followed by Bangladesh (USD 446 billion), Pakistan (USD 338 billion), Sri Lanka (USD 84 billion), Nepal (USD 41 billion), Afghanistan (USD 14 billion), Maldives (USD 7 billion), and Bhutan (USD 3 billion).

Advantages of the Revised Currency Swap Framework:
Stability and Confidence: The currency swap facility acts as a financial safety net during market turbulence, reassuring investors and stabilizing local currencies. The presence of swap agreements reduces uncertainty and maintains stability in financial markets, encouraging ongoing investment and economic expansion.

Liquidity Support: SAARC members will have access to foreign exchange reserves through the swap framework, ensuring central banks can efficiently manage short-term liquidity needs, including funding imports and maintaining exchange rates. This reduces the risk of financial disruptions and facilitates smooth economic operations.

Strengthened Economic Relations: The framework promotes greater financial integration, fostering economic cooperation among SAARC countries. Increased financial cooperation leads to collaborative development projects, trade, and cross-border investments, bolstering economic resilience and regional prosperity.

Trade Facilitation: Stable exchange rates enabled by the currency swap mechanism facilitate smoother trade transactions within the SAARC region. Predictable exchange rates and lower transaction costs benefit businesses engaged in international trade, promoting higher trade volumes and economic efficiency.

Debt Management: The currency swap agreement provides member nations with quick access to foreign exchange reserves, aiding in the efficient management of external debt. This proactive approach helps prevent potential debt crises by ensuring that nations can meet their international financial obligations without undue economic strain.

Crisis Mitigation: The swap facility acts as a rapid response tool during economic crises, such as balance of payments issues or financial market turbulence. By promptly providing funds to nations in distress, the framework mitigates the immediate impacts of crises and supports efforts to stabilize the economy.

India's Trade with SAARC Countries:
India's trade relations with SAARC countries are significant, particularly with Bangladesh, Sri Lanka, Nepal, and Bhutan, where the trade volume exceeds USD 1 billion. According to recent data for FY 2023-24, Bangladesh emerges as one of India's largest trade partners in the SAARC region, with total trade valued at around USD 13 billion. Major exports to Bangladesh include cotton, machinery, and vehicles, while imports comprise textiles, fish, and leather goods.

Nepal is another key trade partner, with total trade amounting to around USD 8 billion. India's major exports to Nepal include petroleum products, vehicles, and machinery, while imports consist of textiles, tea, and carpets. India's trade with Sri Lanka stands at USD 5.4 billion, with significant exports of petroleum products, textiles, and pharmaceuticals, and imports of ships, boats, aircraft, and edible fruits and nuts. Bhutan represents a crucial trade partner with total trade reaching USD 1.2 billion, primarily involving the export of electricity, machinery, and consumer goods, and imports of electricity and minerals.

India's trade with other SAARC countries, including Afghanistan, Maldives, and Pakistan, totals around USD 1 billion. These significant trade partnerships are attributed to historical ties, geographic proximity, and complementary economic structures.

Conclusion:
The Reserve Bank of India's updated Currency Swap Framework for SAARC nations represents a significant step toward enhancing economic cooperation and financial stability in the region. By providing short-term liquidity support and strengthening economic relations through bilateral swap agreements, this framework aims to address balance of payment crises and promote regional economic resilience.

India's commitment to regional stability is demonstrated by the creation of an INR Swap Window alongside continued support in USD and EUR. Despite potential geopolitical and economic challenges, this proactive measure is crucial for meeting short-term financial needs and fostering long-term economic integration. The framework is a pivotal move toward a more stable and cooperative economic environment in South Asia.