India and Japan on Monday agreed to conclude a Bilateral Currency Swap Agreement for $75 billion, a 50 per cent enhancement over the previous $50 billion currency swap agreement between the two countries.
The agreement was concluded during Prime Minister Modi’s visit to Japan on October 28-29 for the India-Japan Annual Summit with Prime Minister of Japan Shinzo Abe. “With a view to enhancing financial and economic cooperation, Governments of Japan and India welcomed the agreement to conclude a Bilateral Swap Arrangement (BSA) of $75 billion,” the India-Japan vision statement said.
The pact is aimed at “bringing greater stability to foreign exchange and capital markets in India” and prospects of country would “further improve in tapping foreign capital for country’s developmental needs”, a finance ministry statement said.
In June 2008, India and Japan had signed a bilateral swap pact enabling both countries to swap their local currencies, either Japanese yen or Indian rupee, against US dollar for an amount up to $3 billion. The agreement was valid for three 3 years from June 2008 to June 2011.
Subsequently, the two countries had signed a similar swap agreement for an amount up to $15 billion in December 2012, effective for a three-year period, that is, till December 2015. In September 2013, the Bank of Japan and the Reserve Bank of India had then expanded the bilateral swap arrangement between Japan and India to $50 billion from $15 billion effective for three years from 2012 to 2015 and the expanded amount was reiterated in the amendment of the Bilateral Swap Arrangement signed in January 2014.
As per the previous bilateral swap agreement between the two countries, the swap agreement will be activated when an IMF-support program already exists or is expected to be established in the near future. Up to 20 percent of the maximum amount of drawing could be disbursed without an IMF-support programme.
Currency swap agreements involve trading in the local currencies, where countries pay for import and export trade, at the pre-determined rates of exchange, without bringing in third country currency like the US dollar.
The Finance Ministry statement also said that the RBI will address the resolution on hedging requirement to encourage investment in infrastructure. “With regard to External Commercial Borrowing (ECB), no mandatory hedging will be required for infrastructure ECB of more than 5 years minimum average maturity,” the vision statement stated.
“Bilateral Swap arrangement with Japan for $75 billion is one of the largest Swap arrangement in the World. Accepting Japanese request, India agreed to do away with requirement of mandatory hedging for infrastructure ECBs of 5 years or more minimum average maturity,” Economic Affairs Secretary Subhash Chandra Garg tweeted.