Japan PM in Delhi, currency pact soon | delhi | Hindustan Times
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Japan PM in Delhi, currency pact soon

Japanese Prime Minister Yoshihiko Noda arrived in India on Tuesday for a two-day visit with a power-packed economic and business agenda including a a multi-billion dollar bilateral currency swap pact. The deal aims at preventing adverse contagion effects during crises fuelled by speculative investment, a move likely to stem the rupee's fall.

delhi Updated: Dec 27, 2011 23:00 IST
HT Correspondent

Japanese Prime Minister Yoshihiko Noda arrived in India on Tuesday for a two-day visit with a power-packed economic and business agenda including a a multi-billion dollar bilateral currency swap pact. The deal aims at preventing adverse contagion effects during crises fuelled by speculative investment, a move likely to stem the rupee's fall.

This is Noda's first visit to India since he became the Japanese Prime Minister in September.

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.

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.

The move might also open up a new window for Indian corporates to raise yen denominated loans at extremely cheap rates. The Japanese central bank have kept its interest rates nearly zero over the last ten years.

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 to prevent any currency crisis in India. India would swap up to $5 billion for yen if Japan were in trouble

"It's cost effective tool of achieving the strategic objective of demonstrating regional cooperation," a government official said.