The government is set to form a task force to look into the possibility of currency swap agreements with some trade partners, a move aimed at saving the rupee. The task force will have representatives from the RBI, Exim Bank, DFS, commerce ministry and industry chambers.
India currently has a bilateral swap arrangement with Japan under which the two countries can swap their local currencies ? Japanese yen or rupee ? against US dollar for an amount up to $15 billion. The facility created in December 2012 has not been used so far.
Officials said India is looking at such agreements with China, South Korea, and a West Asian country. Officials said the agreement with Japan may be increased to a bigger amount.
A bilateral currency swap agreement allows countries concerned to pay for imports in these nations’ currencies, rather than in dollars, up to a mutually agreed threshold. Such agreements will help reduce the demand for dollars in the short term and boost exports.
Commerce minister Anand Sharma also discussed the possibility of entering swap agreements with various countries at the meeting of the board of trade in the Capital on Tuesday.
?I was referring to the possibility of trading in national currency, currency swap with some of the countries, which we need to look at very seriously. If we identify four big countries, it will help, particularly at this juncture,” Sharma said.
?At a time when close to 90% of India’s trade is in dollars, more swap agreements would help. Since trading would be in currencies like renminbi and yen, the demand for dollars will reduce, thus easing the pressure on the rupee,? Sujan Hajra, chief economist with Anand Rathi Securities, told FE.
?This would also mean that such countries would want to export more from India since they would want to utilize the rupee reserves they build under such agreements.?
Analysts said while such agreements can be an effective hedge against the volatility in the forex markets, India should only enter into such agreements with countries with which it does not have a big trade imbalance.
?Those countries should also have a reason to get into such agreements with India. For that, India needs to reduce its trade imbalance with big partners,? Anis Chakravarty, senior director with Deloitte, said.
Last week, Anand Sharma met his counterparts from South Korea and China and discussed with them possible ways to reduce trade imbalance between India and these countries.?
?Who will hold on to the rupee because its value is dropping sharply. Everyone knows the dollar is becoming too expensive to import. The country does not have an incentive to hold on to our currency and there are no takers for our bilateral currency swaps,? said another expert. ?We can consider investment-led trade with China so that the latter relocates its industry here and imports from India. However, there is always an element of suspicion with China. On the other hand, we can consider rupee trade with Iran, which will solve the issue of payments mechanism as we continue to import oil from them,? the expert added.
According to Chakravarty, the agreement with Japan is the biggest one India has entered into so far.
In 2012, Brics leaders discussed swap arrangements among the national currencies as well as reserve pooling. A similar consultation meeting was held during the G20 Summit in 2011.
In fact, Brazil and China agreed for a currency swap deal to improve their commercial relations and increase bilateral trade to $30 billion.