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India Approves ₹30 Billion Withdrawal for Maldives Under SAARC Currency Swap

India has authorised a ₹30 billion withdrawal for the Maldives under the SAARC Currency Swap Framework. This financial relief follows an agreement between the Reserve Bank of India (RBI) and the Maldives government, finalised during President Mohamed Muizzu’s state visit to New Delhi in October 2024. The move highlights India’s continued commitment as a primary economic partner and first responder for the island nation. It aligns closely with India's "Neighbourhood First" policy and Vision MAHASAGAR, ensuring financial stability in the strategically vital Indian Ocean Region.

What Happened

India has authorised the release of ₹30 billion to the Maldives as crucial financial assistance. This represents the first official drawdown under the recently renewed SAARC Currency Swap Framework arrangement to support the island nation.

When & Where

The withdrawal was approved in April 2026. The guiding agreement for this mechanism was signed in New Delhi during the Maldivian President's state visit in October 2024.

Who Is Involved

Key entities include the Reserve Bank of India (RBI), the Maldivian Government, the Indian High Commission in Male, and Maldivian President Mohamed Muizzu.

How It Works

  • The Maldivian central bank requests funds and deposits an equivalent amount of its domestic currency (Rufiyaa) with the RBI.
  • The RBI provides Indian Rupees up to the agreed ₹30 billion limit.
  • The Maldives pays a pre-decided interest rate on this drawn amount.
  • Upon maturity, the Maldives returns the Indian Rupees to India at the original pre-determined exchange rate.

Why It Matters

This mechanism prevents a critical balance of payments crisis and dollar shortage in the Maldives. Strategically, it strengthens India’s footprint in the Indian Ocean Region (IOR), countering the influence of geopolitical rivals. It is highly relevant for UPSC GS Paper 2 (Neighbourhood Relations) and GS Paper 3 (Macroeconomics).

Historical Background

The SAARC Currency Swap Framework was originally launched by the RBI in November 2012. It was designed to provide short-term foreign exchange liquidity to SAARC member nations during sudden economic shocks.

Previous Related Events

The Maldives previously availed a $400 million facility under this exact framework in October 2024. This facility recently reached maturity and was successfully repaid by the Maldivian government.

Static GK Connection

A "Currency Swap Agreement" is a standard macroeconomic tool. It allows two countries to exchange their respective domestic currencies at an agreed rate, bypassing the need for a third hard currency like the US Dollar.

Future Impact

This withdrawal ensures immediate macroeconomic stability for the Maldives. It promotes bilateral trade settlement in local currencies, accelerates the internationalisation of the Indian Rupee, and solidifies India's status as a dependable regional leader.

🔑 Key Points for Revision

  • India approved ₹30 billion withdrawal for the Maldives.
  • Executed under the SAARC Currency Swap Framework.
  • Pact signed between RBI and Maldives during Oct 2024 presidential visit.
  • Follows the successful repayment of a matured $400 million facility.
  • Total swap support by RBI to Maldives exceeds $1.1 billion since 2012.
  • SAARC Swap Framework was launched by the RBI in 2012.
  • Aims to fund short-term foreign exchange liquidity requirements.
  • Alleviates balance of payments distress for SAARC countries.
  • Showcases India's "Neighbourhood First" foreign policy.
  • Reflects Vision MAHASAGAR (Maritime Security and Growth for All).
  • Helps bypass US Dollar dependence for bilateral trade.

🧠 Concept Link (Static GK Deep Dive)

Core Concept: Currency Swap Agreement

  • Definition: A financial contract between two central banks to exchange an equivalent amount of money in each other's currency.
  • Economic Theory: Acts as a backstop line of funding to manage Balance of Payments (BoP) deficits without immediately depleting hard currency reserves.
  • Current Connection: The RBI provided ₹30 billion to the Maldives to stabilize its economy against foreign exchange shortages.
  • Historical Context: The US Federal Reserve pioneered modern swap lines during the 2008 global financial crisis to ensure global liquidity.
  • Related Policies: Managed by the RBI under the Foreign Exchange Management Act (FEMA).
  • India-Specific Relevance: India actively uses swaps with SAARC nations, Japan, and the UAE to protect the Rupee and aid regional allies.
  • Global Comparison: Similar to the Chiang Mai Initiative Multilateralisation (CMIM) used by ASEAN nations, China, Japan, and South Korea.
  • Exam Angle: UPSC frequently tests the conceptual difference between currency swaps, foreign direct investment, and sovereign loans.

❓ Practice MCQs

Q1. Under which framework did India approve the ₹30 billion withdrawal for the Maldives?
A) BRICS Contingent Reserve Arrangement
B) SAARC Currency Swap Framework
C) BIMSTEC Economic Relief Fund
D) Asian Development Bank Liquidity Window

Answer: B

Explanation: The withdrawal was executed under the SAARC Currency Swap Framework, an RBI initiative to support regional neighbors.

Q2. In which year was the SAARC Currency Swap Framework initially launched by the Reserve Bank of India?
A) 2008
B) 2012
C) 2015
D) 2020

Answer: B

Explanation: The SAARC Currency Swap Framework was implemented in November 2012 to provide short-term foreign exchange liquidity to member nations.

Q3. Which Indian strategic vision was explicitly reinforced by extending this financial facility to the Maldives?
A) Act East Policy
B) Look West Strategy
C) Vision MAHASAGAR
D) Project Mausam

Answer: C

Explanation: The High Commission noted the assistance aligns with India's Neighbourhood First policy and Vision MAHASAGAR for maritime security and growth.

Q4. What is the primary macroeconomic purpose of a bilateral currency swap agreement?
A) To write off the external debt of a neighboring country
B) To manage short-term liquidity and balance of payments issues
C) To permanently fix the exchange rate between two nations
D) To fund long-term infrastructure projects

Answer: B

Explanation: Currency swaps provide short-term foreign exchange liquidity to manage balance of payments crises without depleting hard reserves.

Q5. Which institution acts as the primary operational agency for India under the SAARC Currency Swap Framework?
A) Ministry of Finance
B) State Bank of India
C) Reserve Bank of India
D) Export-Import Bank of India (EXIM)

Answer: C

Explanation: The Reserve Bank of India (RBI) operates the SAARC Currency Swap Framework and manages the currency exchange.

Q6. The recent ₹30 billion withdrawal follows the maturity and repayment of an earlier facility worth how much?
A) 100 million US dollars
B) 400 million US dollars
C) 800 million US dollars
D) 1.1 billion US dollars

Answer: B

Explanation: The Maldives recently repaid a 400 million US dollar facility availed in October 2024 before drawing down the new ₹30 billion fund.

📜 Previous Year Question Style (PYQ)

PYQ 1:

With reference to the "SAARC Currency Swap Framework", consider the following statements:

1. It was launched by the Ministry of Finance to promote long-term infrastructure development in South Asia.
2. Under this framework, the RBI offers swaps in US Dollars, Euros, and Indian Rupees.

Which of the statements given above is/are correct?

A) 1 only
B) 2 only
C) Both 1 and 2
D) Neither 1 nor 2

Answer: B

Explanation: Statement 1 is incorrect as it was launched by the RBI (not Ministry of Finance) for short-term liquidity (not long-term infrastructure). Statement 2 is correct as the RBI offers swap arrangements in US Dollars, Euros, and Indian Rupees under the framework.

PYQ 2:

Assertion (A): Currency swap agreements help developing nations reduce their dependency on the US Dollar for bilateral trade.

Reason (R): In a currency swap, two participating countries exchange their respective domestic currencies at a pre-determined exchange rate.

Select the correct answer:

A) Both A and R are true and R is the correct explanation of A
B) Both A and R are true but R is not the correct explanation of A
C) A is true but R is false
D) A is false but R is true

Answer: A

Explanation: By exchanging their own domestic currencies at a fixed rate, nations can settle trade and manage reserves without needing to purchase US Dollars, making the Reason a correct explanation for the Assertion.

✍️ Mains Answer Pointers

Question: "Economic diplomacy, particularly through tools like currency swap agreements, is central to realizing India's 'Neighbourhood First' policy." Discuss this statement with reference to India's recent financial assistance to the Maldives.

Answer Pointers:

  • Introduction: Define currency swap agreements and introduce the recent ₹30 billion withdrawal approved for the Maldives under the SAARC framework.
  • Economic Dimension: Highlights how swap lines prevent Balance of Payments (BoP) crises and stabilize macroeconomic conditions in vulnerable neighboring states.
  • Political & Strategic Dimension: Counters the influence of geopolitical rivals (like China) by proving India is the "first responder" in times of crisis.
  • International Dimension: Promotes the internationalisation of the Indian Rupee (INR) by encouraging bilateral trade settlement in local currencies.
  • Policy Integration: Discuss how this financial tool operationalizes grand strategies like the "Neighbourhood First" policy and Vision MAHASAGAR.
  • Conclusion: Conclude that robust economic integration and timely financial assistance are the most effective ways to build lasting diplomatic goodwill and ensure a secure Indian Ocean Region.
  • Suggested Diagram: A simple flowchart showing the mechanism of a Currency Swap (RBI -> Rupees -> Maldives Central Bank -> Rufiyaa -> RBI).

⚠️ Examiner Trap

  • Trap 1: Students often confuse a currency swap with a grant or a sovereign loan. The correct fact is that a swap is a temporary exchange of currencies that must be reversed at a future date at a pre-agreed exchange rate, with interest paid on the drawn amount.
  • Trap 2: A common wrong assumption is that the SAARC Currency Swap Framework can be accessed by any Asian nation. The reality is that it is strictly limited to the member nations of the South Asian Association for Regional Cooperation (SAARC).

🧭 Exam Tip

For Prelims (Economy), focus heavily on the mechanics of how a currency swap works and who administers it (the RBI). For Mains (International Relations), use this event as a prime example of India's soft power, economic diplomacy, and practical implementation of the "Neighbourhood First" policy.