[Economy] Currency Swap deal between India and Japan

Enter your email address

Once you subscribe,
you'll get my full articles
in your email for free!
See Below
The Number of readers
I already have!

Ankit asked via email

WHAT IS CURRENCY SWAP DEAL BETWEEN INDIA & JAPAN?
HOW WILL INDIA BE BENEFITED?

It is a deal made between the central  banks of India and Japan, to prevent the fall of Rupee and Yen, due to speculative trading @Forex Markets.

Currency swap agreement

• Means that Japan will accept rupees and give dollars to RBI up to a stipulated limit, and similarly RBI will take yen and send dollars to Japan if speculators seek to thrash down the respective currencies.
• Currency swap would take place between the Reserve Bank of India and its counterpart in Tokyo, the Bank of Japan.
• The two central banks would give each other dollars to stabilize their currencies, in case of need.
• A dollar swap arrangement can help emerging economies as it promises a supply of dollars in an emergency.
• The previous currency swap deal between the two nations, signed in 2008, has expired.

How is India benefited?

• Government of India, issues bonds to oil marketing companies to compensate them for losses on sales of petroleum products below cost.
  
• Oil Companies sell these bonds to LIC, Banks etc to recover the money.
• To prevent the downfall of Rupee, RBI can open a Forex-window, where Oil cos line up and exchange their oil-bonds in lieu of dollars from RBI. 
• For this activity: RBI can exchange its rupees to Japanese bank and get dollars and then RBI gives that dollars to Oil cos. in lieu of Government bonds.

Chiang Mai Initiative

(2 marker for GS-Mains)

• 1997: East Asian countries had a big financial crisis due to speculative forex investors.
• Under Chiang Mai Initiative in 2010, ASEAN countries + Japan + China + S.Korea have a currency swap agreements.
• Chiang Mai is a city in Thailand.

Some GK

• 1$= about 76 Yen = about 48 Rupees.
• 1 Yen= about 0.6 Rupees
• 1$= 6 Yuan
• 1 Yuan= 7 Rupees

Ref:
http://www.hindustantimes.com/StoryPage/Print/787093.aspx
http://www.bbc.co.uk/news/business-16336798