India and Japan signed a pact to raise the scope of a bilateral currency swap arrangement to a record USD 75 billion, aimed at bringing in greater stability in the foreign exchange and capital markets, amid a slide in the rupee in recent months.
Finance Minister Arun Jaitley tweeted: “This swap arrangement would be 50% higher than our last swap agreement (signed in 2013). This bilateral swap reflects depth of our deeper economic relationship”.
The agreement- the latest effort to prop up the rupee- was signed during Prime Minister Narendra Modi’s two-day visit to Japan.
- Accepting Japanese request, India agreed to do away with requirement of mandatory hedging for infrastructure ECBs of 5 years or more minimum average maturity.
- The swap agreement will enable the agreed amount of foreign capital being available to India for use as and when need arises.
- It will also help reduce the cost of capital for Indian entities as they access the overseas market.
- The arrangement means the Bank of Japan will accept rupees and give dollars to the Reserve Bank of India (RBI) and, similarly, the RBI will take the yen and give dollars to the Bank of Japan to stabilise each other’s currency in a contingency.
- Such a deal can come handy at allaying fears that India has insufficient cushion to finance current account deficit (CAD) if the situation worsens drastically.
- The International Monetary Fund has warned of the CAD worsening to as high as 3% of India’s GDP in 2018-19, against 1.9% a year before.
- The deal is important for India for psychological reasons than its actual use as the contingency arrangement has never been used since India entered to such deals with Japan in 2008.
- This swap deal adds to the country’s forex reserves and gives sentimental boost to rupee, which has seen continuous bouts of volatility due to global uncertainties as well as domestic worries.
- This facility would technically lift the country’s forex reserve of USD 393.5 billion by USD 75 billion.