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).

“With a view to enhancing financial and economic cooperation, governments of Japan and India welcomed the agreement to conclude a Bilateral Swap Arrangement (BSA) of $75 billion,” read the India-Japan Vision Statement. It was released after the two-day annual summit meet between Prime Minister Narendra Modi and his Japanese counterpart Shinzo Abe in Tokyo.

“This New Swap Agreement should aid in bringing greater stability to foreign exchange & capital markets in India,” the Finance Minister tweeted yesterday, adding that it represented “an increase of 50%” over the last currency swap agreement between India and Japan. Japan had offered a $50 billion currency swap in 2013 and another one for $3 billion in 2008.

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, The Economic Times reported. But it will be used only when required, and will help meet short-term liquidity mismatches.

India has already taken several steps to narrow the CAD, be it hiking import duties on non-essential items or relaxing the framework for external commercial borrowings. This comes against the backdrop of a widening CAD, which ballooned to 1.9% of GDP in FY18, from 0.6% in the previous fiscal, and could deteriorate further to 2.8% this year. This is pegged to be the root cause of rupee volatility.

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.

“Accepting Japanese request, India agreed to do away with requirement of mandatory hedging for infrastructure ECBs of 5 years or more minimum average maturity,” tweeted Economic Affairs Secretary SC Garg.

The agreement is being seen as another important measure towards improving confidence in the Indian market. Foreign investors have pulled out a massive Rs 35,600 crore from the Indian capital markets in the month so far – against Rs 21,000 crore net withdrawals in September – on concerns over rupee depreciation, global trade war tiff and rising crude prices.

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