India, Japan expand currency swap pact to $50 bn

India and Japan have decided to expand their currency swap agreement, a financial tool to help cushion volatility in foreign exchange markets, to $50 billion from $15 billion, it was announced here Friday.

The decision was conveyed following a meeting between Prime Minister Manmohan Singh and Japanese Deputy Prime Minister and Finance Minister Taro Aso on the sidelines of the G20 Summit here.

"The two governments expect that this (expanded currency swap) will contribute to the stability of global financial markets, including emerging economies," a joint statement issued by the two sides said.

"The two governments also reiterated the importance of continued reforms in financial and investment sectors for promoting stable and long term capital inflows into India. The two governments believe that these policy measures will strengthen the bilateral financial cooperation between Japan and India."

Under swap arrangements, two entities -- companies or governments -- agree to exchange one currency for another at a predetermined rate and interest.

The advantage of such pacts is that they eliminate the risk that the future exchange rate will change in a way that puts one party or the other at a disadvantage.

Briefing journalists later, India's Department of Economic Affairs Secretary Arvind Mayaram said this pact will go a long way in addressing volatility in currency markets.

"The problem today is of not reality but of perception. It is clear, neither Japan will need this (money available) nor will we," he said, alluding the pact will notionally shore up India's foreign exchange reserves, currently at around $280 billion, and provide a cushion of perception.

"On our part, we are committed to reducing the current account deficit to 3.7 percent. But markets tend to have a fear of the unknown. Agreements like these will shore up confidence and sentiments," he said.

(Arvind Padmanabhan can be reached at arvind.p@ians.in)