CAD, rupee woes: India increases size of currency swap with Japan to $75 bn

Technically called the bilateral currency-swap agreement, this facility will enable India to save up to $75 billion on tap when the need arises

In another move by the Modi regime to shore up the rupee and address current account deficit (CAD) woes, India and Japan on Monday inked an agreement to raise their emergency provision to increase the forex flow up to $75 billion from the current $50 billion.

Technically called the bilateral currency-swap agreement, this facility will not only enable India to save up to $75 billion on tap when the need arises, it will also help in bringing down the cost of capital for Indian entities while accessing the overseas market.

However, the Reserve Bank of India (RBI) is yet to address the hedging requirement for investment in infrastructure.

The swap arrangement, signed during the visit of Prime Minister Narendra Modi to Japan, should aid in bringing greater stability to foreign exchange and capital markets in India, according to an official statement here.

Modi held delegation-level talks with his Japanese counterpart, Shinzo Abe, and discussed bilateral, regional and global issues including the situation in the Indo-Pacific region.

Currency swap is an agreement between two countries to trade in their own local currencies, where both pay for import and export at pre-determined rates of exchange without bringing in a third-country currency.

“With a view to enhancing financial and economic cooperation, the governments of Japan and India welcomed the agreement to conclude a Bilateral Swap Arrangement (BSA) of $75 billion,” said the India-Japan Vision Statement, issued after the summit-level meeting between the two leaders.

Economic Affairs Secretary Subhash Garg said this was one of the largest swap agreements in the world.

India signed a currency-swap deal with Japan for the first time in 2008, but it was limited to $3 billion. Both the countries reviewed it first in 2011 and then in 2013, and increased the size to $15 billion and $50 billion, respectively.

The policy interest rate in the US has seen a gradual increase in the recent months. This is one of the causes of the dollar strengthening against other currencies of the world. Dollar strengthening is also resulting in a flight of capital from emerging markets.

In recent months, governments and central banks around the world, especially those of emerging economies, have been taking policy measures to address dollar appreciation and improve the availability of foreign capital.

The decision to enter into the currency-swap agreement is another important measure to improve confidence in the Indian market.

To address issues of outward flows of foreign capital, India has taken steps towards containing the CAD and rupee volatility.

These include relaxations in the policy for external borrowing and issuing offshore rupee bonds (masala bonds), reviewing restrictions on foreign portfolio investment in debt, hike in customs duty on curtailing imports of non-essential items, promoting exports, and financing standing working capital of oil-marketing companies by long-term external borrowings.

The trade deficit, the biggest part of the CAD, declined to $13.98 billion in September.