The Centre’s move to sign a bilateral currency swap arrangement with the government of Japan is probably the most substantive step taken so far to support the rupee. The rupee’s incessant slide against the US dollar since the beginning of this calendar had made it the worst performing Asian currency this calendar, but the RBI had restricted its support to intervention in the foreign exchange market; that resulted in depleting the foreign exchange reserves by $33 billion in the last six months. The central bank’s reluctance to take strong steps to stem the rupee decline had also increased speculative pressure on the rupee. While the Centre did try to assuage the sentiment by announcing a few measures such as restricting some non-priority imports, easing overseas borrowing norms for the manufacturing sector and relaxing rules for raising ‘masala’ bonds, the currency market was unmoved, and unsurprisingly so, as the changes would have taken a few years to impact the external account.
The agreement between the governments of Japan and India to provide bilateral currency swap facility worth $75 billion will, however, be more effective in improving the sentiment towards the rupee. The swap agreement will allow both countries to borrow in US dollars or the currency of the other country, up to limits specified. This buffer ensures that the central bank will have enough resources to draw upon if there is unprecedented volatility in currency markets. Since the exchange rate will be fixed in the swap deal, the foreign exchange risk is mitigated. The finance cost is also lower since interest will be charged only on the amount drawn through the facility. This is not the first time that India and Japan have entered in to such an agreement. In December 2012, a similar deal had been struck to the extent of $15 billion; this was increased to $50 billion in 2013, when there was a sharp decline in the rupee. While the swap facility with Japan has not been completely utilised in the past, and is unlikely to be exhausted this year too, such deals help deter speculators.
For now, the fate of the Indian currency is closely entwined with the price of crude oil. With crude prices cooling down since early October, the rupee has also been able to stabilise at around 73 against the dollar. But given the simmering geopolitical tension and continuing trade war, the respite in crude price decline could be temporary. In such a scenario, not only will Indian importers be in a tight spot but companies with extensive overseas borrowings will also find it hard to repay their loans. The Centre should therefore maintain its efforts to support the rupee. Similar bilateral swap agreements need to be signed with other major trading partners too, so that the settlement can be done in local currencies. The policy rate is another tool that the central bank should use to stop fund outflows from Indian debt instruments.