Currency Swap

A currency swap is a derivative agreement between two parties to exchange principal and interest payments in one currency for equivalent payments in another currency over a specified period, with the principal amounts re-exchanged at maturity at the original exchange rate. Unlike a foreign exchange spot or forward transaction, a currency swap involves ongoing periodic interest payments in addition to the exchange of principal. Indian corporates that raise capital in foreign currency markets — for example, through External Commercial Borrowings (ECBs) in USD — frequently use currency swaps to convert their foreign currency obligation into Indian rupees, eliminating both currency and interest rate risk. The RBI monitors the aggregate currency swap positions of Indian banks and regulates ECB-related swaps to manage systemic currency risk in the Indian financial system.