The role of currency swap agreements between central banks is to provide liquidity support and stabilize foreign exchange markets. When two central banks enter into a swap agreement, they exchange currencies to help each other during times of shortage or market stress. This helps maintain financial stability and supports the smooth functioning of global trade and financial systems.

What Is a Currency Swap Agreement Between Central Banks?

A currency swap agreement is a deal between two central banks to exchange their currencies for a set period. This helps one country access foreign currency (usually dollars or euros) when needed. It ensures smooth currency flow in times of financial stress or emergency and helps maintain market confidence.

Why Do Central Banks Use Currency Swaps?

Central banks use currency swaps to help each other manage liquidity during a financial crisis or foreign currency shortage. For example, if a country is running low on US dollars, its central bank can borrow dollars through a swap with the US Federal Reserve. This keeps international trade running smoothly and avoids panic in the markets.

How Do Currency Swaps Help Stabilize the Economy?

Currency swaps help stabilize the economy by ensuring that banks and companies have access to foreign currency when needed. This reduces pressure on the exchange rate, avoids currency crises, and helps maintain investor confidence. It also supports importers, exporters, and foreign investors during uncertain times.

Which Countries Have Currency Swap Agreements?

Many countries have currency swap agreements, especially with major economies like the United States, China, Japan, and the European Union. India has swap deals with countries like Japan, UAE, and Bhutan. These deals strengthen trade and financial ties and provide a backup during emergencies.

How Do Currency Swaps Affect Exchange Rates?

Currency swaps help control sharp movements in exchange rates. When a country gets foreign currency support through swaps, it doesn’t need to sell its own currency in panic. This reduces pressure on the rupee or other currencies, keeping the exchange rate stable and avoiding sudden depreciation.

Are Currency Swaps Risky for Central Banks?

Currency swaps are generally safe because they are done between trusted central banks. The agreements are short-term and are usually repaid on time. However, there is a small risk if one country faces a major financial crisis and can't return the borrowed money. But these cases are rare, and central banks manage the risk carefully.