Context:

India is working with the United States to secure a ‘dollar swap line’ that would help in better management of its external account and provide an extra cushion in the event of an abrupt outflow of funds.

About:

• A swap line is a temporary reciprocal currency arrangement between two central banks.  Under the arrangement, central banks agree to keep a supply of their country’s currency available to trade to another central bank at the current exchange rate.
• The parties agree to swap back these quantities of their two currencies at a specified date in the future, which could be the next day or even three months later, using the same exchange rate as in the first transaction.
• India already has a $75 billion bilateral currency swap line with Japan, which has the second-highest dollar reserves after China.
• The Reserve Bank of India also offers similar swap lines to central banks in the SAARC region within a total corpus of $2 billion.

Significance of Currency Swap Line:

• Manage exchange rate: In the managed fl oating exchange rate system it provides extra cushion to RBI.
• Ensure liquidity: The purpose of a swap line is to keep liquidity in the currency available for central banks to lend to their private banks to maintain their reserve requirements.
• Liquidity is necessary to keep financial markets functioning smoothly during crises.
• A significant monetary policy tool: It reassures banks and investors that it is safe to trade in that currency and it also confirms that the central banks would not let the supply of that currency dry up.