{"id":35884,"date":"2024-03-28T11:22:41","date_gmt":"2024-03-28T11:22:41","guid":{"rendered":"https:\/\/edukemy.com\/blog\/?p=35884"},"modified":"2024-03-28T11:22:42","modified_gmt":"2024-03-28T11:22:42","slug":"currency-swap-agreements-upsc-economy-notes","status":"publish","type":"post","link":"https:\/\/edukemy.com\/blog\/currency-swap-agreements-upsc-economy-notes\/","title":{"rendered":"Currency Swap Agreements &#8211; UPSC Economy Notes"},"content":{"rendered":"\n<figure class=\"wp-block-image size-full\"><a href=\"https:\/\/edukemy.com\/upsc\/upsc-economy?utm_source=Blog&amp;utm_medium=Banner&amp;utm_campaign=Blog+Economy\" target=\"_blank\" rel=\"noreferrer noopener\"><img fetchpriority=\"high\" decoding=\"async\" width=\"1280\" height=\"300\" src=\"https:\/\/edukemy.com\/blog\/wp-content\/uploads\/2024\/06\/17.png\" alt=\"\" class=\"wp-image-42386\" srcset=\"https:\/\/edukemy.com\/blog\/wp-content\/uploads\/2024\/06\/17.png 1280w, https:\/\/edukemy.com\/blog\/wp-content\/uploads\/2024\/06\/17-1170x274.png 1170w, https:\/\/edukemy.com\/blog\/wp-content\/uploads\/2024\/06\/17-585x137.png 585w\" sizes=\"(max-width: 1280px) 100vw, 1280px\" \/><\/a><\/figure>\n\n\n\n<p><strong>Definition:<\/strong> Currency swap agreements involve two central banks exchanging currencies at a fixed exchange rate. It functions as a credit line from one country to another, providing flexibility in managing currency reserves.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_73 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<label for=\"ez-toc-cssicon-toggle-item-69d5312f1db61\" class=\"ez-toc-cssicon-toggle-label\"><p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-cssicon\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-69d5312f1db61\"  \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/edukemy.com\/blog\/currency-swap-agreements-upsc-economy-notes\/#Components\" title=\"Components:\">Components:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/edukemy.com\/blog\/currency-swap-agreements-upsc-economy-notes\/#Indias_Currency_Swap_Agreements\" title=\"India&#8217;s Currency Swap Agreements:\">India&#8217;s Currency Swap Agreements:<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/edukemy.com\/blog\/currency-swap-agreements-upsc-economy-notes\/#Rupee_Depreciation_in_2020_Case_Study\" title=\"Rupee Depreciation in 2020: Case Study\">Rupee Depreciation in 2020: Case Study<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/edukemy.com\/blog\/currency-swap-agreements-upsc-economy-notes\/#Global_Reasons\" title=\"Global Reasons:\">Global Reasons:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/edukemy.com\/blog\/currency-swap-agreements-upsc-economy-notes\/#Government_Measures\" title=\"Government Measures:\">Government Measures:<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/edukemy.com\/blog\/currency-swap-agreements-upsc-economy-notes\/#FAQs\" title=\"FAQs\">FAQs<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/edukemy.com\/blog\/currency-swap-agreements-upsc-economy-notes\/#Q_What_is_a_Currency_Swap_Agreement\" title=\"Q: What is a Currency Swap Agreement?\">Q: What is a Currency Swap Agreement?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/edukemy.com\/blog\/currency-swap-agreements-upsc-economy-notes\/#Q_How_do_Currency_Swap_Agreements_Work\" title=\"Q: How do Currency Swap Agreements Work?\">Q: How do Currency Swap Agreements Work?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/edukemy.com\/blog\/currency-swap-agreements-upsc-economy-notes\/#Q_What_are_the_Benefits_of_Currency_Swap_Agreements\" title=\"Q: What are the Benefits of Currency Swap Agreements?\">Q: What are the Benefits of Currency Swap Agreements?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/edukemy.com\/blog\/currency-swap-agreements-upsc-economy-notes\/#Q_Who_Uses_Currency_Swap_Agreements\" title=\"Q: Who Uses Currency Swap Agreements?\">Q: Who Uses Currency Swap Agreements?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/edukemy.com\/blog\/currency-swap-agreements-upsc-economy-notes\/#Q_What_are_the_Risks_Associated_with_Currency_Swap_Agreements\" title=\"Q: What are the Risks Associated with Currency Swap Agreements?\">Q: What are the Risks Associated with Currency Swap Agreements?<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-12\" href=\"https:\/\/edukemy.com\/blog\/currency-swap-agreements-upsc-economy-notes\/#In_case_you_still_have_your_doubts_contact_us_on_9811333901\" title=\"In case you still have your doubts, contact us on 9811333901.&nbsp;\">In case you still have your doubts, contact us on 9811333901.&nbsp;<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-13\" href=\"https:\/\/edukemy.com\/blog\/currency-swap-agreements-upsc-economy-notes\/#Visit_our_YouTube_Channel_%E2%80%93_here\" title=\"Visit our YouTube Channel &#8211;&nbsp;here\">Visit our YouTube Channel &#8211;&nbsp;here<\/a><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Components\"><\/span><strong>Components:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<ol class=\"wp-block-list\"><li>The borrowing central bank sells its domestic currency to the lending central bank, receiving a hard foreign currency at the prevailing market exchange rate.<\/li><li>The borrowing central bank commits to buying back its currency at the same exchange rate on a specified future date.<\/li><\/ol>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Indias_Currency_Swap_Agreements\"><\/span><strong>India&#8217;s Currency Swap Agreements:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<ol class=\"wp-block-list\"><li><strong>India-Japan Currency Swap (2018):<\/strong><ul><li>This agreement allows the RBI to draw up to $75 billion worth of yen or dollars from the Japanese government, providing flexibility in managing external account stability and forex reserves.<\/li><\/ul><\/li><li><strong>India-UAE Currency Swap (2018):<\/strong><ul><li>A currency swap agreement with the UAE worth $500 million enables both countries to settle trade transactions in their respective national currencies, reducing dependence on third-party currencies.<\/li><\/ul><\/li><li><strong>SAARC Currency Swap Arrangement:<\/strong><ul><li>India has a Currency Swap Arrangement for SAARC Member Countries with a standby amount of $400 million, operated within an overall facility size of $2 billion.<\/li><\/ul><\/li><\/ol>\n\n\n\n<p>These currency swap agreements enhance financial stability, signal stability to investors, and reduce dependence on third-party currencies in trade transactions. They contribute to the internationalization of the Indian rupee.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Rupee_Depreciation_in_2020_Case_Study\"><\/span><strong>Rupee Depreciation in 2020: Case Study<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The depreciation of the Indian rupee against the US dollar in 2020, hitting a historic low of nearly Rs.77 for a US dollar in April, can be attributed to a combination of global and domestic factors:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Global_Reasons\"><\/span><strong>Global Reasons:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<ol class=\"wp-block-list\"><li><strong>Global Economic Contraction:<\/strong><ul><li>The outbreak of the global pandemic led to economic contractions worldwide. The resulting uncertainty and economic downturn led to a decline in optimism about the global and Indian economies. Investors sought safe-haven assets, including the US Dollar, leading to capital flight from other currencies, including the rupee.<\/li><\/ul><\/li><li><strong>US-China Trade Tensions:<\/strong><ul><li>Escalating trade tensions between the United States and China added to the global economic uncertainty. Investors sought refuge in the US Dollar, considering it a safer asset during periods of geopolitical tensions.<\/li><\/ul><\/li><li><strong>Crash in Global Crude Prices:<\/strong><ul><li>The crash in global crude oil prices had a significant impact. Speculative capital moved towards the US Dollar as a safe haven. Foreign institutional investors (FIIs) sold off rupee holdings and converted them into dollars.<\/li><\/ul><\/li><li><strong>Expectations of Future Depreciation:<\/strong><ul><li>Investors anticipated further depreciation of the rupee in the future. This expectation prompted them to sell off rupees at the prevailing exchange rates, fearing that it might become costlier to do so in the future.<\/li><\/ul><\/li><\/ol>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Government_Measures\"><\/span><strong>Government Measures:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>To address the fall in the rupee&#8217;s value, the government took corrective measures, including the liberalization of External Commercial Borrowings (ECBs) and Foreign Portfolio Investments (FPI). These measures aimed to attract foreign capital and stabilize the exchange rate.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"FAQs\"><\/span>FAQs<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Q_What_is_a_Currency_Swap_Agreement\"><\/span>Q: <strong>What is a Currency Swap Agreement?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>A Currency Swap Agreement is a financial contract between two parties to exchange a series of cash flows in different currencies. These agreements are often used to hedge against currency exchange rate risks or to obtain cheaper financing in foreign currencies.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Q_How_do_Currency_Swap_Agreements_Work\"><\/span>Q: <strong>How do Currency Swap Agreements Work?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>In a currency swap, two parties exchange principal and interest payments on a loan denominated in one currency for equivalent amounts in another currency. Typically, one party borrows in its domestic currency and lends in the foreign currency, while the other party does the opposite. The exchange rates and terms are agreed upon at the beginning of the contract.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Q_What_are_the_Benefits_of_Currency_Swap_Agreements\"><\/span>Q: <strong>What are the Benefits of Currency Swap Agreements?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Currency swap agreements offer several benefits, including:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Hedging against exchange rate fluctuations, reducing currency risk exposure.<\/li><li>Accessing cheaper financing in foreign currencies compared to domestic markets.<\/li><li>Managing cash flows more efficiently, especially for multinational corporations operating in multiple countries.<\/li><li>Facilitating international trade by providing certainty in currency exchange rates over a specified period.<\/li><\/ul>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Q_Who_Uses_Currency_Swap_Agreements\"><\/span>Q: <strong>Who Uses Currency Swap Agreements?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Currency swaps are commonly used by multinational corporations, financial institutions, and governments. Multinational corporations use them to manage currency risks associated with international operations, while financial institutions utilize them for arbitrage opportunities and liquidity management. Governments may employ currency swaps to stabilize exchange rates or obtain foreign currency reserves.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Q_What_are_the_Risks_Associated_with_Currency_Swap_Agreements\"><\/span>Q: <strong>What are the Risks Associated with Currency Swap Agreements?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>While currency swaps can provide benefits, they also come with risks, including:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Exchange rate risk: Fluctuations in exchange rates can affect the value of cash flows exchanged in the swap.<\/li><li>Credit risk: There&#8217;s a risk that one party may default on its obligations, leading to financial losses for the other party.<\/li><li>Regulatory risk: Changes in regulations or government policies can impact the terms and legality of currency swap agreements.<\/li><li>Liquidity risk: Difficulty in finding counterparties or exiting swap agreements can pose liquidity challenges, especially during times of market stress.<\/li><\/ul>\n\n\n\n<figure class=\"wp-block-image size-full is-resized\"><a href=\"https:\/\/edukemy.com\/upsc\/upsc-essay?utm_source=Blog&amp;utm_medium=Banner&amp;utm_campaign=Essay\" target=\"_blank\" rel=\"noreferrer noopener\"><img decoding=\"async\" data-src=\"https:\/\/edukemy.com\/blog\/wp-content\/uploads\/2024\/06\/UPSC-Essay-Course-1280\u00d7300-1-3.svg\" alt=\"\" class=\"wp-image-42688 lazyload\" width=\"781\" height=\"182\" src=\"data:image\/gif;base64,R0lGODlhAQABAAAAACH5BAEKAAEALAAAAAABAAEAAAICTAEAOw==\" style=\"--smush-placeholder-width: 781px; --smush-placeholder-aspect-ratio: 781\/182;\" \/><\/a><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"block-c6ab63ae-7083-4831-b519-cb89dacafb18\"><span class=\"ez-toc-section\" id=\"In_case_you_still_have_your_doubts_contact_us_on_9811333901\"><\/span><strong>In case you still have your doubts, contact us on 9811333901.<\/strong>&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p id=\"block-52c5a91b-6ed6-46e3-b781-7cc0c63a0b76\">For UPSC Prelims Resources,&nbsp;<a href=\"https:\/\/edukemy.com\/upsc-cse-prelims-resource-centre\" target=\"_blank\" rel=\"noreferrer noopener\">Click here<\/a><\/p>\n\n\n\n<p id=\"block-d014fe86-d628-49d8-82ce-6c60dc6e7a73\">For Daily Updates and Study Material:<\/p>\n\n\n\n<p id=\"block-38177954-e668-4d8d-b250-d0fbd5a09390\">Join our Telegram Channel &#8211;&nbsp;<a href=\"https:\/\/t.me\/WithEdukemy4IAS\" target=\"_blank\" rel=\"noreferrer noopener\">Edukemy for IAS<\/a><\/p>\n\n\n\n<ul class=\"wp-block-list\" id=\"block-49ca2fe3-109f-4a88-b72e-9df49c3d328e\"><li>1. Learn through Videos &#8211;&nbsp;<a href=\"https:\/\/bit.ly\/3vOD8sU\" target=\"_blank\" rel=\"noreferrer noopener\">here<\/a><\/li><li>2. Be Exam Ready by Practicing Daily MCQs &#8211;&nbsp;<a href=\"https:\/\/bit.ly\/3Q9z2nF\" target=\"_blank\" rel=\"noreferrer noopener\">here<\/a><\/li><li>3. Daily Newsletter &#8211; Get all your Current Affairs Covered &#8211;&nbsp;<a href=\"https:\/\/bit.ly\/3bE2y5J\" target=\"_blank\" rel=\"noreferrer noopener\">here<\/a><\/li><li>4. Mains Answer Writing Practice &#8211;&nbsp;<a href=\"https:\/\/bit.ly\/3mZuVxl\" target=\"_blank\" rel=\"noreferrer noopener\">here<\/a><\/li><\/ul>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"block-43ccddc1-5348-445f-ab6b-7baaf29fe58d\"><span class=\"ez-toc-section\" id=\"Visit_our_YouTube_Channel_%E2%80%93_here\"><\/span>Visit our YouTube Channel &#8211;&nbsp;<a href=\"https:\/\/www.youtube.com\/@EduKemyforIAS\" target=\"_blank\" rel=\"noreferrer noopener\">here<\/a><span class=\"ez-toc-section-end\"><\/span><\/h4>\n","protected":false},"excerpt":{"rendered":"<p>Currency swap agreements involve two central banks exchanging currencies at a fixed exchange rate. It functions as a credit line from one country to another,<\/p>\n","protected":false},"author":17,"featured_media":35891,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_eb_attr":"","om_disable_all_campaigns":false,"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"_uf_show_specific_survey":0,"_uf_disable_surveys":false,"_lmt_disableupdate":"","_lmt_disable":"","footnotes":""},"categories":[209],"tags":[2854,235,232,213,140],"class_list":["post-35884","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-economy-notes","tag-currency-swap-agreements","tag-economy-notes","tag-upsc","tag-upsc-notes","tag-upsc_preparation_strategy"],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/edukemy.com\/blog\/wp-json\/wp\/v2\/posts\/35884","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/edukemy.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/edukemy.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/edukemy.com\/blog\/wp-json\/wp\/v2\/users\/17"}],"replies":[{"embeddable":true,"href":"https:\/\/edukemy.com\/blog\/wp-json\/wp\/v2\/comments?post=35884"}],"version-history":[{"count":1,"href":"https:\/\/edukemy.com\/blog\/wp-json\/wp\/v2\/posts\/35884\/revisions"}],"predecessor-version":[{"id":35892,"href":"https:\/\/edukemy.com\/blog\/wp-json\/wp\/v2\/posts\/35884\/revisions\/35892"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/edukemy.com\/blog\/wp-json\/wp\/v2\/media\/35891"}],"wp:attachment":[{"href":"https:\/\/edukemy.com\/blog\/wp-json\/wp\/v2\/media?parent=35884"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/edukemy.com\/blog\/wp-json\/wp\/v2\/categories?post=35884"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/edukemy.com\/blog\/wp-json\/wp\/v2\/tags?post=35884"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}