India and Japan have signed a $75 billion bilateral currency swap agreement on Monday during Prime Minister Narendra Modi’s visit to Tokyo, India said in a statement.
The agreement should help bring greater stability to foreign exchange and capital markets in India, the statement added.
The Agreement shall aid in bringing greater stability to foreign exchange & capital markets in India. The facility will serve as a second line of defense for the rupee after the $393.5 billion of foreign exchange reserves that the Reserve Bank of India (RBI) has at its disposal.
Under the arrangement, India can acquire dollars from Japan in exchange for rupees. Conversely, Japan can also seek dollars from India in exchange for yen.
The arrangement will be used only when required and will help meet short-term liquidity mismatches.
The currency swap agreement is an important measure in improving the confidence in the Indian market and it would not only enable the agreed amount of capital being available to India, but it will also bring down the cost of capital for Indian entities while accessing the foreign capital market.
The swap arrangement should aid in bringing greater stability to foreign exchange and capital markets in India. With this arrangement in place, prospects of India would further improve in tapping foreign capital for country’s developmental needs. This facility will enable the agreed amount of foreign capital being available to India for use as and when the need arises.
What is this Currency Swap Arrangement (CSA)?
This is an arrangement, between two friendly countries, which have a regular, substantial or increasing trade, to basically involve in trading in their own local currencies, where both pay for import and export trade, at the pre-determined rates of exchange, without bringing in third country currency like the US Dollar.
In such arrangements no third country currency is involved, thereby eliminating the need to worry about exchange variations.