Bilateral Currency Swap Agreements ‘for’ Industrial Corridors – Himanshu Damle

Bilateral Currency Swap Agreements ‘for’ Industrial Corridors…..one amongst the many relaxation therapies on offer!!!!

The title is as relevant as offering hopes for answers as could be imagined. But, what in reality is markedly different is for opponents to wade through such connectors, fix up cracks to prevent any speculations on this gargantuan project from leaking and wasting away.

It was in 2007, before the scheduled visit of the then Japanese-prime minister Shinzo Abe, that the Reserve Bank of India and Bank of Japan signed the first Bilateral Currency Swap Agreement between the two countries to be active for a period of three years from June 2008 till June 2011. Under the inking of the pact, Japan was to provide US $3 billion out of its Foreign Exchange Reserves to India, if the latter faced a Foreign Exchange (FOREX) crisis. India, too was expected to reciprocate if Japan faced a similar crisis.

The year 2007 was characterized by three major highlights.

1. It was observed as the India-Japan Friendship Year.
2. Comprehensive Economic Cooperation Agreement (CECA) between the two countries had been finalized less than a year back, and
3. MAIN AGENDA OF Mr. ABE’S VISIT WAS TO SIGN THE FINANCIAL DEAL FOR DMIC (Delhi-Mumbai Industrial Corridor). 

What is really interesting here is that neither India foresaw any FOREX crisis then with its appreciating currency against the US dollar, and a strong FOREX reserves of US $215 + billion, nor did it ever assume to take Japan off the Balance of Payments (BoP) crisis. So, why was agreement signed remains anything else but academic in nature, and maybe to help push Japanese investments into the country. It is anybody’s guess, what is being referred to here: criss-cross of invasive corridors….

This was the first time, such an agreement was signed between the two countries. Late last year (2012), RBI and Bank of Japan signed another such agreement for a period of three years starting December 2012 till December 2015, where they agreed to swap their local currencies for a sum of US $15 billion. According to an official release of RBI, “The arrangement aims at addressing short-term liquidity difficulties and supplementing the existing international financial arrangements, as one of the efforts in strengthening mutual cooperation between Japan and India.”

Are not these declarations similar sounding to the ones associated with what is commonly heard about the corridor?

According to Chief Economist, DK Joshi, CRISIL India, such swaps are preventive rather than curative, mitigating the effects of global financial crisis rather than insulating against such crises. For Joshi, such agreements spell out insurance and mutual cooperation between countries, as is becoming increasingly common in the world.

Crucially, this agreement will be activated when an IMF-support program already exists or is expected to be established in the near future. Nevertheless, up to 20 percent of the maximum amount of drawing could be disbursed without an IMF-support program.

Currency Swap: This is an arrangement, where 2 parties exchange specific amounts of different currencies initially, and a series of interest payments on the initial cash flows are exchanged. Often times, one party pays a fixed interest rate, while the other will pay a floating exchange rate. At maturity of the swap, the principal amounts are exchanged back. These are different from interest rate swaps, in that, these involve the principal and interest to be exchanged in full. These are foreign exchange transactions and are not required by law to be shown on balance sheets. First devised in the 1970s, the swaps were instrumental in getting around exchange controls.

Himanshu Damle