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 beeffective 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.
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.