India agrees with Sri Lanka on $400 million in currency swap

India's Reserve Bank has agreed to a $400 million currency swap facility for Sri Lanka until November 2022, tweeted on Friday by the Indian high commission. The development comes amid COVID-19 as a relief to Sri Lanka and will help in its post-pandemic economic recovery. A currency swap is a trade where two parties exchange interest and principal in separate currencies.

Currency swaps used to get foreign currency loans at a higher interest rate than can be provided by borrowing directly from an international market. The intervention of the RBI follows a recent bilateral 'technical dialogue' on rescheduling the outstanding debt repayment to India from Colombo.  A currency swap is a trade where two parties exchange interest and principal in separate currencies. Companies doing business overseas often use currency swaps to get loan rates in the local currency that are more attractive than if they borrow money from a local bank.

The Federation of Indian Chambers of Commerce and Industry (FICCI) in association with the Laxman Kadigamar Institute of Diplomatic Relations and Strategic Studies recently organised a webinar on 'Deepening Economic Collaboration between India and Sri Lanka.' Addressing the webinar, Sri Lankan Foreign Secretary Ravinatha Aryasinha said the neighbours could explore potential textile, IT and agribusiness collaborations, sectors in which India was 'powerful.'

Assuring that Sri Lanka will "facilitate, secure and foster a free environment for Indian investors," he invited Indian businesses in the production of industrial zones, automotive parts, pharmaceutical, textile and engineering activities. Ravinatha Aryasinha also speaking on Sri Lanka's exports, commented on market access difficulties, difficulties that were often created by non-tariff barriers in receiving countries. He said they were an impediment and urged FICCI to work with the Sri Lankan Mission in New Delhi to help improve Sri Lankan spice exports and concentrate on the Indian market.

Both countries are currently involved in rescheduling negotiations on debt repayments. The last round of the debate on Sri Lanka's rescheduling of bilateral debt repayment took place on July 22. The Indian mission, involving senior representatives from the Ministry of External Activities, Ministry of Finance, and EXIM Bank, interacted via a video conference with representatives from the Sri Lankan Department of External Resources.

A statement from the Sri Lankan Indian mission said, "The next round of technical discussions between the two sides on the debt repayment rescheduling is expected to take place soon”. On May 23, Sri Lankan President Gotabaya Rajapaksa spoke to Prime Minister Narendra Modi asking the former Indian government to provide USD 1.1 billion of individual swap facilities under the SAARC project amid the COVID pandemic to supplement USD 400 million.

OSL Take: Sri Lanka and India boast of strong bilateral and trade ties that have been further bolstered by the free trade agreement (FTA). Sri Lankan businesses are, therefore given preferential treatment when engaging in business ventures in India. Local companies could use this benefit to form joint ventures/partnerships with Indian companies. Foreign businesses/investors looking at doing business with India could explore the possibility of setting up base in Sri Lanka to reach out to the Indian market.

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