Currency-swap deal cap raised to $50 bn

India gets a Japanese hedge against rupee fall

With the rupee around 65 a dollar in recent times, New Delhi on Friday enlarged its agreement with Tokyo to swap the Indian currency with dollars from $15 billion to $50 billion till December 2015. Japan, too, can exchange the yen for dollars, according to the arrangement.

The currency-swap deal, which works in an emergency to tackle the balance of payments (BoP) problem, was announced by the two countries after bilateral talks, on the sidelines of the Group of 20 Leadership Summit here. The deal is basically aimed at lifting sentiments and allaying any fears that India has insufficient cushion to finance its current account deficit (CAD) if the situation worsens drastically.

“The two governments decided to expand the current bilateral currency-swap arrangement from $15 billion to $50 billion,” a statement from India said here.

The arrangement means the Bank of Japan will accept rupees and give dollars to the Reserve Bank of India (RBI) and, similarly, India’s central bank will take yen and send dollars to the Bank of Japan to stabilise the two nations’ currencies, in a contingency. The arrangement can be put into operation if foreign exchange reserves deplete or speculators hammer the currencies.

“This arrangement is aimed at addressing possible short-term liquidity mismatches and supplementing existing international financial arrangements,” RBI said in Mumbai.

CRISIL Chief Economist D K Joshi explained the arrangement was like a top-up to one’s forex reserves. “This is a kind of insurance. It only comes in handy when there is a problem. In case of a worst-case scenario, this will help us tremendously. In today’s volatile age, one never knows what is required and when. Yes, these deals cannot insulate us from the global crisis but will surely help in mitigating the problems.”

Economic Affairs Secretary Arvind Mayaram said he did not think that India would need the dollars from Japan under this agreement. “The problem today is not of reality but of perception. Arrangement of this nature shores up sentiments. Japanese investors also feel greater comfort."

India and Japan had inked a bilateral swap agreement for $15 billion on December 4, 2012, for three years. This was done after the previous currency-swap deal with a corpus of $3 billion between the two nations, signed in 2008, expired. The 2008 agreement was never used despite the last quarter of 2008-09 making the situation tough due to the global financial crisis. It was for just $3 billion.

The about-three-time increase in the swap deal means India wants to cushion itself, given the way the rupee has been depreciating in the recent past after talks of tapering the US quantitative easing programme began on May 22. The Indian currency had depreciated 20.21 per cent to 65.25 against a dollar this financial year till September 6. Much of the depreciation, 17.73 per cent, was after May 22.

The deal would send a signal to markets that India had a cushion to finance its current account deficit (CAD), which is targeted to come down to 3.7 per cent of gross domestic product (GDP) in 2013-14 from the record 4.8 per cent in the previous year, Joshi said.

“This is a kind of on-tap swap window between BOJ and RBI where RBI takes the US dollar into its reserves in exchange for rupees, which BOJ is expected to deploy in gilts. The take-away is the improved sentiment that now RBI has much stronger dollar reserves position to defend rupee,” said J Moses Harding, executive director and chief business officer at Lakshmi Vilas Bank.

The 2012 deal had a provision that the swap agreement could be activated when an International Monetary Fund (IMF)-support programme existed or was expected to be established in the near future. Nevertheless, up to 20 per cent of the maximum amount of drawing could be disbursed without an IMF-support programme. It would be interesting to see if this clause will be present in the new enlarged deal.

“The Government of India and the Reserve Bank of India will discuss and finalise the terms of this enhancement with their Japanese counterparts,” RBI said in the statement.

There were speculations of India going to the IMF for a loan, though policymakers have denied these. RBI Governor Raghuram Rajan and Planning Commission Deputy Chairman Montek Singh Ahluwalia had ruled it out, saying India had enough forex reserves.