India knocks Japan's doors to arrest fall in rupee

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India is stepping up its battle to defend the rupee's downfall. Sources indicate that the government is looking at Japanese funds for this purpose, reports CNBC-TV18's economic policy editor, Siddharth Zarbai.

CNBC-TV18 had reported a few weeks back that there are several steps in the offing to battle the sharp fall in the Indian rupee. It is now learnt that an enhanced dollar swap facility will be signed later this week with Japan.

In 2008, India and Japan had initialled a USD 3 billion dollar swap facility; it was first of its kind at that point of time. However, according to government sources the withdrawal from that fund has never been done. But, now there is a proposal which is being finalised of raising that almost up to five times. The final figure should be known by Wednesday when the Japanese prime minister and signs this agreement with the Indian prime minister.

Essentially, this will allow the Reserve Bank of India (RBI) to draw down dollars at a particular date from Bank of Japan, use it to curb this volatility in the rupee. Although, we have a comfortable reserve positions, the assessment of the government and RBI is that the ability of India to defend its currency is not limitless. Therefore, this facility will be used at an appropriate time and those dollars that are borrowed to defend the rupee will be repaid at a later date.

In terms of the cushion and the ability of this Japanese fund account that we will have at its disposal, besides the actual action, Government sources also expect that there will be a strong signalling effect when it comes to the rupee. This step should be looked at in account of all the other steps that have been taken in the ongoing battle to defend the rupee.

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