Reserve Bank of India (RBI) and Japan’s Central bank, Bank of Japan, decided on 18 December 2013 to enhance the bilateral currency swap arrangement from 15 billion dollars to 50 billion dollars. The agreement would help bring stability in the financial markets in both the countries.
The deal is basically aimed at lifting sentiments and allaying any fears that India has insufficient cushion to finance its current account deficit (CAD) if the situation worsens drastically.
The arrangement implies that, the Bank of Japan will accept rupees and give dollars to the Reserve Bank of India (RBI). Similarly, India’s central bank will take yen and send dollars to the Bank of Japan.
The arrangement will help stabilise the currencies of the two nations in time of contingencies. It can be put into operation whenever there is depletion of foreign exchange reserves or speculators hammer the currencies.
Further, this will help reduce the demand for dollars in the short-term and boost exports and could be effective hedge against the volatility in the foreign exchange market. India should only enter into such agreements with countries with which it does not have a big trade imbalance.
The currency swap arrangement was first signed in 2008 and was limited to 3 billion dollars. In 2011, the deal was renewed and the size was increased to 15 billion dollars.
About Currency Swap
A currency swap is defined as the exchange of principal and interest in one currency for the same in another currency. It is considered to be a foreign exchange transaction and is not required by law to be shown on a company's balance sheet.
For example, suppose a U.S.-based company needs to acquire Swiss francs and a Swiss-based company needs to acquire U.S. dollars. These two companies could arrange to swap currencies by establishing an interest rate, an agreed upon amount and a common maturity date for the exchange.
Currency swap maturities are negotiable for at least 10 years, making them a very flexible method of foreign exchange.
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When: 18 December 2013