India and Japan inked a currency swap deal on 29th June 2008 aimed at addressing short-term liquidity difficulties. The deal enables both countries to swap yen or rupee against the U.S. dollar for up to $3 billion. Although this is India's first currency swap deal, Japan has swap agreements with certain other countries such as China, South Korea and Thailand.
Under the framework, Japan would swap up to $3 billion for Indian rupee to prevent any currency crisis in India. India would swap up to $3 billion for yen if Japan were in trouble. In other words, the deal allows Japan to accept rupees and give US dollars to India if the need arises and India too will accept yen against dollars. However, drawing beyond 20% of the stipulated amount ($3 billion) would require India to have an IMF (International Monetary Fund)-support programme.
The idea is to allow a country that finds itself with short-term liquidity problems to borrow from its partners' foreign reserves to absorb heavy selling pressure on its currency.
According to Kyodo news agency reports, the two nations would launch the facility in the spring, It is also reported that the two countries have agreed to henceforth hold working-level talks twice a year to examine each other's macroeconomic conditions.
"As the arrangement is just for $3 billion and India has over $300 billion foreign exchange reserves, it is more a milestone in mutual co-operation between the two countries than a tool to address liquidity difficulties. However, such an arrangement will help concerned nations to have stability in financial market," sources said.
The above development if seen in the backdrop of a recent survey conducted by the Japan Bank for International Cooperation (JBIC) indicates that economic ties between the two countries are heading for a bright future. According to the survey covering 403 companies, nearly 70% of Japanese manufacturers regard India as the most attractive country to do business over the next 10 years, followed by China (around 67%), Russia (37%) and Vietnam (28%). This shows that India has now emerged as the most-favoured destination for long-term Japanese investment. The recent Ranbaxy - Daiichi deal is perhaps a case in point.
Contributed by:
Prof. Bikramjit Sen
(Globsyn Business School)
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