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India Currency Swap Agreement: What You Need to Know

In recent news, the Reserve Bank of India (RBI) has entered into a currency swap agreement with the Central Bank of the United Arab Emirates (UAE). This move is aimed at boosting trade and investment between the two countries while making their respective currencies more accessible to businesses and investors.

So, what exactly is a currency swap agreement?

A currency swap agreement is a financial transaction where two parties exchange a certain amount of their own currencies with each other. This is typically done to mitigate currency risk, which occurs when fluctuating exchange rates can negatively impact a business or investor`s financials.

In the case of India and the UAE`s currency swap agreement, the two central banks will be able to exchange up to $75 billion (AED 275 billion) worth of each other`s currencies. This will enable businesses and investors from both countries to access liquidity in the other`s currency without having to worry about currency fluctuations.

Why is this important?

India and the UAE have a strong economic relationship. The UAE is India`s third-largest trading partner, with bilateral trade reaching $60 billion in 2019. Additionally, many Indian expats live and work in the UAE, contributing to the country`s economy.

However, until now, Indian businesses and investors have faced challenges in accessing UAE currency. This currency swap agreement will make it easier for Indian businesses to trade with their UAE counterparts by providing them with access to UAE currency without having to convert their Indian rupees.

This move could also help to strengthen India`s currency and economy. By making the Indian rupee more accessible to UAE investors, it could increase the demand for Indian currency, boosting its value in the long run.

What are the benefits of a currency swap agreement?

Currency swap agreements have several benefits, including:

1. Mitigating currency risk: By exchanging currencies, businesses and investors can reduce the impact of currency fluctuations on their financials.

2. Increasing liquidity: Currency swap agreements can help increase liquidity in both currencies involved in the agreement, making it easier for businesses to access the foreign currency they need.

3. Boosting trade and investment: Currency swap agreements can help facilitate trade and investment between countries by making their currencies more accessible to each other`s businesses and investors.

In conclusion, the currency swap agreement between India and the UAE is a positive move towards strengthening their economic ties and making it easier for businesses and investors from both countries to access each other`s currency. This move could potentially boost trade and investment between the two nations, contributing to their economic growth.