India and Japan last week signed a $75 billion bilateral currency swap agreement, which is expected to bring stability to the foreign exchange and capital markets in the country.
Economic Affairs Secretary Subhash Chandra Garg said the agreement was one of the largest swap arrangements in the world.
What does it mean?
A currency swap agreement between two countries is signed between the central banks. In this case, RBI will get a certain amount of yen and the Bank of Japan will get an equivalent amount in Indian rupees. The rate will be decided on the basis of prevailing market rates.
“Later, both of the countries will repay the amount at the same exchange rate. In return, there will be a swap rate to be decided by the two countries. Normally, they will be linked to London inter-bank rate, called Libor. Japan has done this with a number of countries, including China, Malaysia, Singapore, Indonesia and Thailand, among others. Previously, we had this kind of an agreement in the past, but never used it. The decision has not impacted the market, considering the current currency rate at 74 against the dollar,” said Madan Sabnavis, chief economist, CARE Ratings.
How it will help India?
There are expectations that the facility will not only make the agreed amount of capital to India on tap for use, it would also help bring down the cost of capital for Indian entities while accessing foreign capital markets.
After this pact, India and Japan would not require dollars to trade between themselves. The move may help support the rupee as well as yen against the dollar.
According to a release issued by the government, the swap arrangement should aid bring greater stability to foreign exchange rates and the capital market in India. With this arrangement in place, Indias prospects would further improve in tapping foreign capital for countrys developmental needs. This facility will make the agreed amount of foreign capital available to India for use as and when the need arises.
Anindya Banerjee, Currency Analyst at Kotak Securities, said if RBI runs out of reserves, than it can tap into currency swap as a secondary reserve, rather than approaching International Monetary Fund. However, the decision will not impact the rupee at present, as India is not running out of foreign reserves. So, it is completely a non-event for the market. This kind of swaps helps increase the intervention part of the central bank.
India had foreign exchange reserves of around $393.52 billion as of October 19 against $426 Billion in April.
“In case we come to a situation where we run out of reserves and we do not have enough foreign currency to pay for our immediate bills, then this amount may support India,” said Banerjee.
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