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Sep 06, 2013, 03.56 PM IST | Source: CNBC-TV18

India, Japan to enhance currency swap facility: Sources

A proposal to enhance currency swap facility, to double it or even take it to USD 35 billion is likely to be discussed

Siddharth Zarabi

Economic Editor, CNBC-TV18

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India and Japan have hiked their existing currency swap facility, a move that Indian government officials here at the ongoing G-20 Summit describe as a "important signal" for the Rupee.

The existing swap facility of USD 15 billion with Japan, which was agreed upon last year, has been enhanced to USD 50 billion, a senior government official told CNBC TV18.

The proposal was part of the discussion agenda for the bilateral meeting that Indian Prime Minister Manmohan Singh had with Japan's deputy prime minister Taro Aso.

At the end of the bilateral meeting, the joint press statement of the two countries said they had decided to expand the current bilateral currency swap arrangement from USD 15 to USD 50 billion. "The two governments expect that this will contribute to the stability of global financial markets including emerging economies", the statement said, adding that it was important to continue reforms in financial and investment sectors  for promoting stable and long term capital inflows into India. This, the two nations believe, would strengthen the bilateral financial cooperation between Japan and India.

Also Read: US Tapering: Are BRICS nations prepared for life after?

The key benefit of this swap facility, which is yet to be utilized and in the words of Montek Singh Ahluwalia would be to build a strong "second line of defence for the rupee".

Ahluwalia, who is India's Sherpa at the Summit, made it clear that "India does not need to draw down on facility". The swap facility, he said, can only be used when the reserves dip beyond a comfortable level. India currently has around USD 280 billion of foreign exchange, a reserve that is enough to cater to around seven months of the country's annual import bill.

The enhanced Yen swap facility would therefore add "firepower" to India's reserves and send a signal to the markets that India has enhanced ability to defend its exchange rate, if the need arises. The underlying theme of this proposal is to improve sentiment on the exchange rate.

Meanwhile, the G-20 Summit, which is underway here, continues to be dominated by the civil strife in Syria and the increased possibility of a US intervention in the troubled nation. Russia is opposed to any form of US intervention, even as India wants the United Nations to coordinate and lead the process of discovering the truth about the alleged use of chemical weapons in Syria.

PM Singh spoke about this at a dinner meeting of G-20 leaders last night and it is believed that the final Summit declaration would make some sort of statement on the matter.

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