FACTS FOR YOU

CUR­RENCY SWAP

India Business Journal - - KNOWLEDGE ZONE -

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.

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