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Currency Swap

Currency Swap Agreement

  • India, Japan sign $75 billion currency swap agreement

Under the arrangement, India can acquire dollars from Japan in exchange for rupees while Japan can seek dollars from India in exchange for the yen.

At a time the rupee has depreciated over 13% against the dollar (year to date), the India and Japan yesterday inked one of the world’s largest bilateral currency swap agreements. The move will not only strengthen the bilateral financial cooperation between the two countries but also help stabilise the rupee and help in containing the current account deficit (CAD).

India, the world’s sixth-largest economy, had been facing difficulties in making payments to its major trading partners such as Iran, Russia and Venezuela after the Trump administration had imposed economic sanctions on them. With Russia and Iran, the Indian government has been trying to establish a mechanism to make import payments via domestic currency.

Last December, India’s Ministry of Finance had notified the rate of exchange for Turkish lira and Korean won to facilitate trade and business with these two countries and ease the process of conversion of their respective currencies into Indian Rupees and vice-versa.

Also on 4 December 2018, India and the UAE signed a currency swap agreement for 35 billion rupees or 1.8 AED ($496 million approx) to reduce dependency on the US dollar in bilateral trade.

The facility will serve as a second line of defence for the rupee after the $393.5 billion of foreign exchange reserves that the RBI has at its disposal. However the forex reserves, which provide a buffer to the central bank to handle high volatility in the currency markets through controlled selling, have been steadily dwindling. According to RBI data, foreign exchange reserves declined by $942 million in the week to October 19, after posting a steeper fall of $5.14 billion in the previous week. The currency swap agreement not only props up the rupee, but also beefs up the forex reserves.

In a statement, Finance Ministry added that this facility will enable the agreed amount of foreign capital being available to India for use as and when need arises. That apart, it will also help in bringing down the cost of capital for Indian entities while accessing foreign capital market.

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