India approves $700 million forex swap with Sri Lanka until IMF loan relief

India Sri Lanka

India has approved a $700 million currency swap of dollars for Sri Lankan rupees until the island nation receives an International Monetary Fund loan, the Indian government said on Friday.

Sri Lanka is facing a balance-of-payments crisis after a third of its foreign exchange reserves has been depleted within the 15 months to January as the central bank heavily defended to the rupee LKR=LK, while strong imports in a lower interest rate regime also increase dollar outflows.

The Indian cabinet approved the swap for three months or “till the time Sri Lanka avails the IMF facility, whichever is earlier”, India’s Press Information Bureau said in a statement.

The cabinet also gave retroactive approval for an extension of an existing $1.1 billion swap from the Reserve Bank of India, which was to be repaid on March 3, through to March 8.

“Approval of this proposal will provide a temporary relief to Sri Lanka till alternative arrangement is in place,” it said, adding that the move shall help in strengthening Sri Lanka’s economic stability and official reserves.

President Maithripala Sirisena’s coalition government is expected to receive a $1.5 billion IMF loan to boost foreign exchange reserves. Finance Ministry officials say the negotiations are due to start later this month.

Sri Lanka’s official reserves edged up 4.2 percent to $6.57 billion by end February, compared with a month ago, while the government’s foreign currency repayments in the next 12 months was at $4.57 billion, latest central bank data showed.

Sri Lanka has suffered a foreign outflow of around 210 billion rupees ($1.45 billion) or 46 percent from the government securities since January 2015 on speculation over the U.S. Federal Reserve’s interest rate hike.

The rupee has fallen around 7 percent since the central bank floated it on Sept. 4 after heavily defending the currency.

The central bank also raised key policy interest rates by 50 basis points last month and increased commercial banks’ statutory reserves ratio by 150 basis points from Jan. 16 to curb imports.