India’s current account deficit remains at comfortable levels despite the crisis on the export front, but given the rupee’s volatility and concerns over the composition...
India’s current account deficit remains at comfortable levels despite the crisis on the export front, but given the rupee’s volatility and concerns over the composition of its seemingly robust forex reserves, New Delhi has sought revival of the recently ended $50-billion currency swap facility with Tokyo.
The bilateral swap facility, first put in place in the midst of the global financial meltdown in 2008 with a small size of $3 billion was fortified to a three-year $15 billion arrangement in December 2012 and was upgraded further to a solid $50 billion a year later. The arrangement, which wasn’t used by either side, expired on Dec 3.
Official sources told FE that India has pitched for a new three-year $50 billion currency swap deal with Japan during Prime Minister Shinzo Abe’s three-day visit to New Delhi. Such arrangements are increasingly a norm between major economies and help enhance the armoury of the central banks concerned to cope with sudden financial shocks with effective market intervention. In the case of the India-Japan deal, Bank of Japan will accept rupees and give dollars to the Reserve Bank of India and vice versa to stabilise the two nations’ currencies during contingencies.
While India’s current account deficit is well under control (at 1.2% of GDP in Q1FY16), the rupee has depreciated about 5.6% since the beginning of 2015 mainly due to external factors. The rupee hit a two-year low of 66.84 against the dollar on December 8 on worries of US Fed raising interest rates later this month and the possibility of reforms at home slowing down due to a Parliament logjam. It closed at 66.64 on Friday.
Officials said the swap deal is basically aimed at lifting sentiments and allaying any fears that India lacked the requisite cushion to finance its CAD. Though the capital inflows are satisfactory, the fact that large part of these were foreign portfolio flows remained a matter of concern, they said.
“It is a friendly act on the part of Japan towards India. The deal should have been readily agreed to by the Japanese side by now,” an official said.
But with bureaucratic process dragging on, especially on the Japanese side, the deal could not be announced during Abe’s visit, a source said.