India has entered into a bilateral currency swap agreement with Japan for $75 billion in a bid to strengthen the rupee and boost the capital markets. This is one of the key agreements signed between the two countries as a part of the Thirteenth India-Japan Bilateral Summit, which was held in Tokyo on Monday. The summit also discussed various other initiatives that could benefit both countries.
As a part of this currency swap arrangement, India can get foreign capital (in dollars) from Japan in exchange for rupees when the need arises. In response, India will also return the same favour for Japan when there is a need. This is an agreement that can be used by both countries only when the need arises. The foreign capital available under this arrangement can be used by India as the second line of defense in addition to its existing $393.5 billion foreign exchange reserves.
This currency swap agreement is 50% higher in valuation than the previous agreement between the two nations in the year 2013. In 2013, both countries entered into a similar agreement for $50 billion when India faced a similar stress in currency exchange rates. Before that, both countries had a similar agreement for $3 billion in the year 2008.
India is currently facing issues with regard to a steep increase in current account deficit. It is estimated that this deficit could increase to 2.8% of the country’s GDP. This is often cited as one of the reasons for weakening rupee value. This bilateral arrangement can help prevent rupee volatility by enabling India to meet its short-term liquidity mismatches.
As a part of this bilateral agreement, both countries will also engage in a 2+2 dialogue between the foreign ministers and defense ministers of both nations. The summit also discussed various initiatives regarding both countries’ shared vision of peace and other new areas of cooperation. During their meeting, the Prime Ministers of both countries have also committed to the prosperity of the Indo-Pacific region.
Source: Financial Express