• Japan: $1.25 trillion
• India: $278 billion
What is a currency swap facility?
Central banks swap their local currencies
(in this case rupee or the Yen) for US dollars by dipping into each other's forex reserves
Japan swap effect
The resultant dollar supplies will ease the pressure on the rupee
Other such arrangements
Royal Monetary Authority of Bhutan can draw dollar, euro or rupee in multiple tranches up to a maximum of $100m
Similar deal possible with Fed?
Experts do not think so. India’s
situation does not meet Fed’s
criteria to set up bilateral swap lines
Mumbai, Sept. 6: The floundering rupee found a prop today after India and Japan decided to expand their bilateral currency swap facility to $50 billion from $15 billion.
In a currency swap facility, central banks swap their local currencies (in this case Indian rupee or the Japanese Yen) for US dollars by dipping into each other’s forex reserves. The resultant dollar supplies will ease the pressure on the domestic currency.
The agreement was announced on the sidelines of the ongoing Group of Twenty (G20) summit in St. Petersburg today.
Japan reported forex reserves of $1.25 trillion at the end of August compared with India’s $278 billion.
Japan has the second highest forex reserves after China’s $3.51 trillion.
The swap facility is designed “to contribute to the stability of global financial markets, including emerging economies and promote long-term capital flows into India,” a statement released by the two countries said.
The rupee has been mauled since May 22 when the US Federal Reserve announced it would consider tapering its $85-billion-a-month bond buying programme later this year. The bond buying programme is the centrepiece of the US quantitative easing.
In December last year, the Reserve Bank of India signed a bilateral swap agreement with the Bank of Japan for $15 billion. This arrangement was aimed at addressing possible short-term liquidity mismatches and supplementing existing international financial arrangements.
Details of the enhanced currency swap facility are sketchy. Sources said the terms of the agreement have yet to be finalised. The government of India and the RBI will hammer out these details with their Japanese counterparts.
The expansion of the currency swap agreement is, however, on expected lines as India looks at ways to bring down the pressure on the rupee and improve inflows. Both the Union government and the RBI have over the past few weeks indicated that they will take various measures to prevent a major slide in the value of the rupee.
The government is expected to look at entering into more currency swap arrangements with other countries over the coming days.
In March this year, the RBI entered into a currency swap agreement with the Royal Monetary Authority of Bhutan wherein the latter can make drawals of US dollar, euro or rupee in multiple tranches up to a maximum of $100 million or its equivalent.
Moreover, the government is also exploring the possibility of using local currency for trade with major trading partners instead of the US dollar. It is learnt that the Centre could first look at countries such as China and other BRIC nations.
Raghuram Rajan, who took over as the governor of the RBI on Wednesday, has also highlighted the need to settle more trades in rupees as part of his “rupee internationalisation” plan.
With the possibility of more bilateral swap arrangements not being ruled out, a question that is being asked is whether India will look at a similar deal with the US Federal Reserve. Experts, however, do not think so.
“Can the RBI approach the Federal Reserve? We believe it is highly unlikely that the RBI would seek — and the Fed would approve — a bilateral US dollar swap line. In our view, India’s current situation does not meet the Federal Reserve’s criteria for the establishment of bilateral swap lines,” Indranil Sen Gupta, chief economist at Bank of America-Merrill Lynch, said in a recent note.