Currency Swaps A currency swap, also known as a cross-curre | Indian Economy -Civil Service Gurukul
Currency Swaps
A currency swap, also known as a cross-currency swap, is an off-balance sheet transaction in which two parties exchange principal and interest in different currencies. The purpose of a currency swap is to lower exposure to exchange rate risk or reduce the cost of borrowing a foreign currency.
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Benefits of currency swap:
The absence of an exchange rate risk is the major benefit of such a facility. This facility provides India with the flexibility to use these reserves at any time in order to maintain an appropriate level of balance of payments or short-term liquidity. Currency swaps between governments also have supplementary objectives like promotion of bilateral trade, maintaining the value of foreign exchange reserves with the central bank and ensuring financial stability (protecting the health of the banking system).
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