FACTS FOR YOU
In late October, India and Japan signed a $75-billion bilateral currency swap agreement. This pact is expected to bring stability to the foreign exchange and capital markets in While India has such arrangements with many Asian nations, the one with Japan is among the largest of such deals, valued at $75 billion. The government hopes that this deal will act as a buffer to shore up the rupee, which has depreciated by
over 15 per cent against the dollar this year.
Simply put, a bilateral currency swap is an open-ended credit line from one country to another at a fixed exchange rate. The country using this loan pays interest to the country which provides it at a benchmark interest rate such as the LIBOR (London Inter-Bank Offered Rate).
The currency swap arrangement will allow the Indian central bank to draw up to $75 billion worth of yen or dollars as loan from the Japanese government, whenever it needs this money. The RBI can either sell these dollars or yen to importers to settle their bills or to borrowers to pay off their foreign loans. The RBI can even hang on to the money to shore up its own foreign exchange reserves and defend the rupee. Should the JapaIndia.
nese central bank knock on India's doors for a $75-billion loan, the RBI too is obliged to provide it at LIBOR out of its own reserves.
In recent times, the rupee has been falling against the dollar because of its widening Current Account Deficit (the difference between imports and exports of goods and services). This leads to importers raising their demand for dollars far beyond what exporters bring into the country.
While the RBI had amassed foreign currency reserves of over $426 billion by April 2018, it has had to use up some of this in recent months to prop up the rupee. India's present forex reserves at over $390 billion are still comfortable. Yet having a $75-billion loan-on-demand from Japan gives the RBI an additional buffer to fall back on, should it need extra dollars.
The currency swap agreement with Japan is expected to bring stability to India's forex market.