• Reserve Bank of India (RBI) and Bank of Japan have signed a bilateral swap agreement.
• The agreement was negotiated during the visit of Prime Minister Narendra Modi to Tokyo last year.
Bilateral Swap Agreement
• The Swap agreement will provide India access to 75 billion US dollars against the 50 billion dollars under earlier BSA.
• Under the agreement, India can access 75 billion dollars for its domestic currency, for the purpose of maintaining an appropriate level of balance of payments or short-term liquidity at its discretion.
• Currently, India has a comfortable level of foreign exchange. The bilateral swap agreement will provide
India to access the reserves if at any point of time when the need arises.
Benefits of the Swap Agreement
• The currency swap makes it easier to improve liquidity conditions.
• Currency swap agreements help in saving for a rainy day when the economy is not looking in good shape.
• The swap agreements also contribute towards stabilising the country’s balance of payments (BoP) position.
• The agreement aids in improving confidence in the Indian market.
How does the Swap Agreement work?
• As part of the agreement, the Bank of Japan (Japanese central bank) will accept rupees and give dollars to the Reserve Bank of India (RBI). Similarly, RBI will take the yen and give dollars to the Bank of Japan to stabilize each other’s currency.
• Since the Japanese Yen is one of the five currencies included in the IMF’s SDR basket and is counted as global hard currency, the central part of the agreement boils down to Japanese commitment to exchange US Dollar for rupee from India.
Mains Paper 3: Economy
Prelims level: Bilateral Swap Arrangement