One of the metrics of a country’s economic greatness is its ability to steer trade and investment relations with other countries away from geopolitical risks. That is where currency swaps play a role. The swaps allow partner central banks of partner countries to exchange their local currencies. This directly enables importers and exporters to settle trade in local currencies, bypassing the need for intermediary currencies like the dollar, which reduces exchange rate risks and transaction costs. Beyond promoting trade, these swap lines are increasingly used as a global financial rescue mechanism. Countries facing foreign exchange shortages or debt distress can draw down on these lines to bolster gross reserves and provide short-term liquidity support.
China has signed bilateral currency swap agreements with over 40 foreign central banks or monetary authorities, with more than 30 active agreements. The network boasts a total active scale of over $586 billion. These swap lines, managed by the People’s Bank of China (PBOC), serve several key functions and present distinct features – for example, the European Central Bank and the PBOC maintain an active multi-billion euro-renminbi swap line to address potential CNY liquidity shortages for banks. By providing foreign central banks with immediate access to RMB, these agreements encourage the use of the Chinese currency in global trade and finance, supporting China’s long-term goal of internationalising its currency.
Of late, growing concerns over America’s rising debt and Washington’s expanding use of sanctions have sparked debate over the long-term dominance of the dollar as the world’s reserve currency. The uncertainty has contributed to stronger demand for gold and a rise in oil transactions conducted in China’s renminbi and cryptocurrencies. An alarmed Trump administration is now exploring new currency ‘swap’ arrangements with countries in the Gulf and Asia as part of efforts to reinforce the dollar’s global role. Under such arrangements, the US would exchange dollars for another country’s currency, allowing partner nations greater access to dollars for trade and financial transactions. These agreements could be administered either through the US Treasury Department or the Federal Reserve.
India should draw lessons from China’s widening reach and start by showing greater generosity to other countries, starting with our neighbours. In our neighbourhood, China has forged currency swap arrangements with Pakistan, Sri Lanka and Nepal. It also provides substantial economic, infrastructural, and humanitarian assistance to Sri Lanka and Nepal.
In recent years, the Reserve Bank of India has been working to increase the acceptability of the rupee in global trade in the hope it may lead to the internationalisation of the rupee. The RBI has permitted banks from 20-plus countries to open Special Vostro Rupee Accounts for settling payments in rupees. These countries are the UAE, Bangladesh, Belarus, Botswana, Fiji among others. This helps Indian traders make payments in rupees for all imports, which are credited to Vostro accounts (special rupee accounts in Indian banks) of the corresponding banks of the partner countries, while Indian exporters are paid from the balances in the designated Vostro accounts. Any surplus rupee balances in Vostro accounts can be used for investments, including government of India securities.
India has renewed a bilateral swap arrangement with Japan for up to $75 billion as a back-stop line of support, in case of any balance-of-payments issues. It was a $35 billion agreement with the UAE. As part of the effort, the RBI had announced a Currency Swap Arrangement too with the SAARC nations in 2024. Valid through 2027, the RBI operates a $2 billion $/Euro window alongside a Rs25,000 crore rupee swap facility for SAARC member nations. Under this framework, the RBI was to enter into bilateral swap agreements with the central banks of the SAARC countries, which wished to avail the swap facility. The amount is peanuts and should have grown multi-fold as the SAARC Currency Swap Facility was first launched in 2012.
The currency swap facility is available to all SAARC member countries, provided they sign bilateral swap agreements. While Pakistan is nominally included in the Regional SAARC Currency Swap Framework, no swap has ever been operationalised between the two nations. Instead, Pakistan has turned to China and the People’s Bank of China now provides the State Bank of Pakistan with a 30 billion Chinese Yuan facility. Therein lies the tragedy. If the rupee is to emerge as a global tender, then New Delhi will have to show