India, Japan in $50bn currency swap

The rupee surged 87 paise on Friday after Japan extended support to India's fight against currency volatility by agreeing to more than treble the scope of the bilateral swap arrangement to $50 billion. 

    The facility between the Reserve Bank of India and the Bank of Japan enables both countries to swap Japanese yen or the Indian rupee for US dollars in an unforeseen situation. It is essentially an arrangement to tide over short-term foreign exchange crunch. The deal was first signed in 2008 and was limited to $3 billion, but the size was increased to $15 billion when the arrangement was renewed in 2011. 
    The rupee opened at 66 up from its previous close of 66.12 against the dollar and gained during the day to close at 65.25 against the dollar. "The swap arrangement with Japan was a positive factor for the rupee. This supplements RBI's earlier measures 
whereby it has agreed to swap dollars raised by banks through long-term non-resident deposits and borrowings at 350 basis points," said Ashish Vaidya, head of fixed income, currencies and commodities, at UBS India. He added that these measures under which RBI borrows dollars will complement its swap facility with oil companies where it lends dollars. 
    "The two governments expect that this will contribute to the stability of global financial markets, including emerging economies," India and Japan said in a joint statement after a meeting between Prime Minister Manmohan Singh and Japanese deputy PM Taro Aso on the sidelines of the G-20 summit. 
    Forex dealers said that the tide appears to have turned for the rupee and this could result in unwinding of long dollar positions. But uncertainty continues to hang over the market in respect of the situation in Syria and the outcome of the meeting of the US Federal Reserve on September 17. "A reduction in the Fed's bond buyback has already been factored in. The question now is how much?" said a dealer.