India and Japan Monday concluded a $75 billion Bilateral Swap Arrangement (BSA), a move that will help in bringing greater stability in foreign exchange and capital markets in the country.

Bilateral Swap Arrangement (BSA)

Why Currency Swap?

  • RBI’s foreign currency reserves have shrunk from over $426 billion in April
  • The rupee has depreciated the most among Asian currencies amid emerging market volatility triggered by rising US interest rates, pricier crude, geopolitical concerns and intensifying protectionism and trade wars.
  • It has fallen over 13% since start of 2018, having recovered from 74.48 to the dollar earlier this month to close at 73.41.
  • The arrangement will be used only when required, and will help meet short-term liquidity mismatches.
  • India has taken several steps to contain its current account deficit, which could swell to an estimated 2.8% of GDP, and is seen as the root cause of rupee volatility.
  • Conversely, Japan can also seek dollars from India in exchange for yen.

Other measures to keep CAD

Some of the measures taken by the government to attract foreign capital include the review of certain restrictions on FPI investment in debt. Govt is promoting exports through hike in customs duty to curtail imports of non-essential items, relaxations in the policy for external borrowings and issuance of offshore rupee bonds (Masala Bonds) etc.

What it means for India?

  • The BSA will allow India to pay for any loans that it borrows from Japan in Indian rupees, rather than borrowing a third-party acceptable currency like the US dollar.
  • It will also allow the country to make any interest or principal payments in domestic currency.
  • This, in turn, will increase the demand for the national currency in the forex market, making it more valuable, and stabilizing the rupee-to-dollar ratio.

Benefits of Currency Swap

The BSA will aid in bringing greater stability to foreign exchange and capital markets in India. This facility will enable the agreed amount of foreign capital being available to India for use as and when need arises.

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