India agrees for $400 million currency swap with Sri Lanka

India and Sri Lanka on Friday agreed for US $400 million currency swap agreement.

The agreement signed by Reserve Bank of India extends the swap facility for Sri Lanka till November 2022.

The development comes as a relief to Sri Lanka amidst COVID-19 and will help in its post-pandemic economic recovery.

A currency swap is a transaction in which two parties exchange principal and interest in different currencies. Companies doing business abroad often use currency swaps to get more favourable loan rates in the local currency than if they borrowed money from a local bank.

For example, if Sri Lanka borrows Rs 100 from India and promises to repay Rs 100 in Indian currency but interest in dollars or vice versa, both parties benefit by hedging against interest rates.

Both countries are currently engaged in debt repayment rescheduling talks.