CBSL-RBI Swap: Support in time of need

• Published date: 25 May 2015
• Publication title: Daily Mirror

The Reserve Bank of India (RBI) has stepped in to provide timely support to Sri Lanka when its external finances were deteriorating and the currency was under pressure.

The US $400 million, drawn upon by the CBSL under the SWAP arrangement with the RBI, was one of the outcomes of Prime Minister Modi's visit to Sri Lanka.

There is a further US $1.1 billion which can be utilized. These arrangements are providing much-needed insurance against depleting external reserves and a boost to the creditworthiness of the country. However, it is important to realise that the support provided by the SWAP arrangement with the RBI only serves to buy time. It does not address the underlying causes of the elevated risks associated with the country's external position.

SWAP arrangements among Central Banks are found in many parts of the world. They provide insurance against reserve depletion stemming from 'shocks'. For instance, the Central Banks of several East and South East Asian countries established the Chiang Mai Initiative after the Asian Financial Crisis. It is a multilateralized currency swap arrangement among the 10 members of ASEAN, China (including Hong Kong), Japan and South Korea. It was initiated as a series of...