India secures Japan’s help in saving the rupee by signing its largest currency swap agreement with the country ever

• During Prime Minister Modi’s summit with his Japanese counterpart Shinzo Abe, India and Japan signed a deal to swap $75 billion worth of their currencies with each other.
  
• The bilateral swap agreement, which is 50% larger than the $50 billion deal signed between the two countries in 2013, comes against the backdrop of a rising US dollar and a freefall in emerging market currencies.
  
• The move is a big win for the RBI, which will be able to bolster its foreign exchange reserves by buying dollars from Japan in exchange for rupees.
  

As of today, it seems that India has a new best friend in Asia. On 29 October, during Prime Minister Modi’s summit with his Japanese counterpart Shinzo Abe, India and Japan signed a deal to swap $75 billion worth of their currencies with each other so as to jointly hedge their bets against a volatile foreign exchange market.

The bilateral swap agreement, which is 50% larger than the $50 billion deal signed between the two countries in 2013, comes against the backdrop of a rising US dollar and a freefall in emerging market currencies. It allows both countries to swap their local currencies against the US dollar. The additional benefit of such an arrangement is a boost in bilateral trade and investment.

The agreement becomes applicable when settling trade transactions. Imports and exports are settled in local currencies at pre-determined exchange rates as opposed to a benchmark currency like the US dollar, thereby circumventing any problems arising from the appreciation or depreciation of one of the currencies. Taro Aso, the finance minister of Japan, told Reuters that the deal was meant to function as a “safety net” in the event of a crisis in financial markets.

The move is a big win for the RBI, which will be able to bolster its foreign exchange reserves by buying dollars from Japan in exchange for rupees. Japan will also be able to buy dollars from India in exchange for yen.

The yen is one of the more stable currencies in Asia, having roughly maintained the same level of ¥112.70 to the dollar since the beginning of 2018, following a strong appreciation in February and March which was offset by a fall in the following months. The rupee, meanwhile, has depreciated by 14% since 1 January amid a large outflow of foreign capital, a surge in oil prices and a widening trade deficit.

Just like its September summit with the US, India also agreed to have 2+2 talks with Japan. The meeting entails a sit down between the foreign and defence ministers of both countries and presages a further boost in military and economic cooperation.

The third partner?

Interestingly, both India and Japan have or are in the process of signing their own separate agreements with China to shore up their respective currencies. Last week, Japan and China struck a three-year $30 billion currency swap deal - their largest such bilateral deal. The heads of the countries are meeting to cement ties amid trade tensions with the US.

Meanwhile, India is also reported to be mulling an agreement with China to settle the imports of goods from China to be settled in yuan and exports of goods like medicines, sugar and oilseeds to be settled in rupees. The deal will enable the countries to save on the costs of converting into US dollars.