India and Japan sign record $75-billion currency swap deal

The bilateral currency swap arrangement is aimed at bringing in greater stability in the foreign exchange and capital markets, amid concerns over a sliding rupee.

India and Japan have signed an agreement to raise the scope of a bilateral currency swap arrangement to a record $75 billion, reports FE. The purpose of this move is to bring in greater stability in the foreign exchange and capital markets, as  rupee has been sliding alarmingly in recent months.
 
“This swap arrangement would be 50% higher than our last swap agreement (signed in 2013). This bilateral swap reflects depth of our deeper economic relationship,” finance minister Arun Jaitley tweeted.
 
The pact is the latest effort by the government to prop up the rupee. It was signed during Prime Minister Narendra Modi’s ongoing two-day visit to Japan.
 
FE quoted, economic affairs secretary Subhash Chandra Garg’s tweet: “Accepting Japanese request, India agreed to do away with requirement of mandatory hedging for infrastructure ECBs of 5 years or more minimum average maturity.” 
 
Under the swap agreement,  the agreed amount of foreign capital will be available to India for use as and when need arises, said the finance ministry.
 
Additionally, the swap agreement will help reduce the cost of capital for Indian entities as they access the overseas market. 
 
Under the arrangement means the Bank of Japan will accept rupees and give dollars to the Reserve Bank of India (RBI) and, similarly, the RBI will take the yen and give dollars to the Bank of Japan to stabilise each other’s currency in a contingency. The deal will work to allay fears that India has insufficient cushion to finance current account deficit (CAD) if the situation worsens drastically.
 
Notably, the rupee has slid around 14% in the past one year, and has emerged as Asia’s worst-performing major currency. The slide has happened partly due to elevated trade and current account deficits following a spike in global oil prices and has prompted authorities to step up the defence of the domestic currency through various steps. Besides this, the government is also exploring options to trim imports and get into barter trade system with some oil producers like Iran and Russia.
 
On behalf of their respective countries, RBI and Bank of Japan had first signed such a deal for $3 billion in 2008 against the backdrop of the global financial meltdown. The umbrella deal was raised to $15 billion in 2012 for a three year period. But in 2013, the two sides again raised the limit to $50 billion, when India’s faced its worst CAD of 6.8% in the October-December quarter of that year.
 
Already, the International Monetary Fund has warned of the CAD worsening to as high as 3% of India’s GDP in 2018-19, against 1.9 per cent a year before.
 
The deal is assumes significance for India for psychological reasons more than its actual use. The contingency arrangement has never been used since India entered to such deals with Japan in 2008. 
 
This swap deal adds to the country’s forex reserves and provides sentimental boost to rupee. The rupee has been  witnessing continuous bouts of volatility due to global uncertainties as well as domestic worries. 
 
This pact technically lifts the country’s forex reserve of $393.5 billion by $75 billion.
 
India’s forex reserves had touched a record high of $426 billion on April 13, 2018. However, since then, the forex reserve has been on a slide, largely due to interventions by the central bank to curb volatility in rupee.
 
Source: FE

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