The swap facility will be funded entirely by India and enable the central banks of Afghanistan, Bangladesh, Bhutan, Maldives, Nepal, Pakistan and Sri Lanka to borrow funds in dollars, euros and Indian rupees, the RBI said in a statement today. Governor Duvvuri Subbarao made the announcement at a meeting of South Asian central bank officials in Nepal, it said.
The South Asian Association for Regional Cooperation, SAARC, has been working toward greater economic collaboration and enhancing a free-trade pact adopted in 2004. The decision for a swap arrangement, “intended to provide a back stop line of funding” to meet any balance of payment and liquidity crisis, was made in 2009, when foreign currency flows dried up amid the global credit crunch, the RBI said.
“The fund is more an initiative to take leadership in the South Asian region since India is the largest economy,” said Sujan Hajra, chief economist at Anand Rathi Financial Services Ltd. in Mumbai. “The amount in itself isn’t big.”
Under the arrangement, member nations can withdraw dollars, euros and rupees for a period of three months at an interest rate of 200 basis points above the London interbank offered rate, or Libor, which can be rolled over twice. The second rollover will attract an additional interest of 50 basis points, the statement said.
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