India exploring benefits of currency swap agreements

The aim is to shore up exports and bring down trade deficit

India is exploring possibilities of entering into currency swap agreements with trade partners aiming to shore up exports and bring down trade deficit, which is putting pressure on the rupee.

 

"A need arises to examine the issue of currency swap agreement and its impact on the Indian trade policy ... The matter is of particular interest to Ministry of Commerce," a senior government official said.

 

Senior officials of Commerce and Finance ministries will discuss the issue later this month. The meeting, scheduled for August 20, will also be attended Reserve Bank officials.

 

India has signed currency swap agreements with Japan ($15 billion) and Bhutan ($100 million). China has shown active interest in entering into such an agreement with India but it is yet to be signed.

 

The meeting is taking take place at a time when several countries are "actively engaged" in entering into currency swap agreements with their counterparts.

 

Currency swap agreements involve exchange of one currency for another currency and are generally motivated by the comparative advantage.

 

The Commerce Ministry has already sought views of the Centre for WTO Studies, a Delhi-based institute, on the impact of currency swap agreements on trade policy.

 

The institute, in its concept paper submitted to the Commerce Ministry, said such agreements help in fund management and currency risk management, among other things.

 

It further said such agreements with those countries with which India has trade deficit, may have both positive and negative effects.

 

"Therefore, India may opt for signing currency swap agreements in local currencies on an experimental basis with a few selected countries and based on the experience may decide to continue these further," the concept paper said.

 

A dollar swap arrangement, it further said, would help India in supporting the rupee, which has depreciated significantly against the US currency over the past few months due to various global and domestic factors.

 

Currency swaps have emerged as an important derivative tool after the global financial crisis of 2008 to hedge the exchange rate risks.

 

Swap agreements in US dollar, the concept paper said, provide confidence to the market and prevent excess volatility in financial and foreign exchange markets.

 

The rupee tumbled by 63 paise to 61.40 against the dollar in late morning trade on fresh buying of US currency by banks and importers in view of fall in the equity market. The currency has lost over 16% since April.