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India, Japan to ink currency swap agreement soon

business Updated: Dec 26, 2011 01:04 IST
HT Correspondent
HT Correspondent
Hindustan Times
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India and Japan will likely ink a multi-billion dollar bilateral currency swap pact aimed to prevent adverse contagion effects during crises fuelled by speculative investment, a move that will help stem the rupee’s fall.

Currency swaps involve an exchange of cash flows in two different currencies. By its special nature, these instruments are used for hedging risk arising out of volatility in the foreign exchange markets. http://www.hindustantimes.com/Images/HTEditImages/Images/26-12-buss-2.jpg

The agreement would effectively mean that Japan will accept rupees and give dollars to India up to a stipulated limit, and similarly India will take yen and send dollars to Japan if speculators seek to thrash down the respective currencies.

The idea is to allow a country that finds itself with short-term liquidity problems to borrow from its partners’ foreign reserves to absorb heavy selling pressure on its currency.

While the exact quantum of the currency swap deal has not been announced, sources indicated that it would be more than $10 billion.

Under the framework, Japan would swap up to $5 billion for Indian rupee, and India would likewise swap up to $5 billion for the yen.

“It is a cost-effective tool of achieving the strategic objective of regional cooperation,” a government official said.

The two governments have completed several rounds of negotiations on the issue. The agreement is likely to be signed in the coming days during a bilateral summit meeting.

The move might also open up a new window for Indian corporates to raise cheap yen-denominated loans. The Japanese central bank has kept its interest rates near zero over the last 10 years.

East Asian countries and Japan have had currency swap agreements, also referred as the Chiang Mai Initiative, to prevent a crisis that rocked the region in 1997 after many currencies went into a tailspin.