India and Japan on the 29th of October have signed $75 billion dollar bilateral currency swap agreement on the visit of Prime Minister Modi’s visit to Japan. This came after nearly a week after Japan signed a similar agreement with Beijing. Reportedly this swap agreement would be 50% higher than India’s earlier swap agreements.
India has signed two such agreements prior to this one earlier with Japan. In 2013 both the countries have signed a currency swap agreement of $50 billion dollars and in 2008 another agreement of $3 billion dollars was signed.
The main aim of the new currency swap agreement is to bring about greater stability in foreign exchange and capital markets in India. With this agreement India can acquire dollars from Japan in exchange of rupees.
Currency Swap: –
This is process by which one country can exchange its currency with that of a currency of the country with which it is in agreement or even a third one.
With this agreement India can acquire Yen or dollars from Japan upto $75 billion in exchange of rupees. The money taken by India needs to be returned after a given period of time in the agreement.
Advantages of this agreement: –
- The for-ex reserves of RBI gets boost of $75 billion dollars.
- Short term liquidity mismatches can be met quickly.
- Improves market sentiment and curbs speculative pressure on the rupee.
- Increase in the trust foreign investors.
Conversely, Japan can also acquire dollars from India in exchange of Yen. Agreements like these help the nation to contain its current account deficit, which would swell to an extent of 2.8% of GDP and is seen as the main cause of rupee voltality. Read More News at Storify News