India and Japan’s $75 billion currency swap signed during the two-day visit of prime minister Narendra Modi is significant. Stabilising the rupee that has been on a free slide over the last few months, shoring up market sentiment and curbing current account deficit (CAD) could be the key considerations behind the deal. But, from medium-to-long-term perspective, non-dollar, non-euro currency arrangements mark a big departure from India’s pre-colonial fixation with the US dollar. Japanese prime minister Shinzo Abe has proved to be a reliable and dependable partner for India that has been battling several issues on the external front.
The rupee-yen arrangement is mutually beneficial given that both India and Japan propose to make joint investment and trade forays into Sri Lanka, Myanmar and Bangladesh apart from a dozen African countries. This is not the first time that Japanese funds in yen were made available on the tap. Way back in 2013, the currency arrangement began with $15 billion and quickly moved up to $50 billion. Logically, currency swap could have been $100 billion thereby allowing both sides to aggressively invest in other countries.
Secondly, the cost of funds for Indian companies will be modest with such currency swap arrangements. Even when the euro or the US dollar strengthens, Indian companies will have the leeway to swap their equity and debt exposure into Japanese yen without batting an eyelid. Such bilateral swaps will also take the sheen out of IMF basket of designated currencies that include US dollar, British pound and the euro. The India-Japan currency swap is akin to what Tokyo has with Chinese currency renminbi for about $30 billion.
Currency swaps at pre-determined rates are also popular between several partner countries that seek to move away from US dollar or euro markets. For instance, the biggest non-dollar, non-euro oil deal was signed between China and Russia valued at $400 billion over 30 years. Russia will accept Chinese renminbi payments against crude oil supplies. For long, India and Russia had similar rupee-rouble trade that could be revived even now given the huge expansion in investment and trade especially in defence purchases. Disregarding the unilateral sanctions slapped by US and EU, India continued to buy crude from Iran with payments settled either through barter deals or rupee account. Even this year, Indo-Iranian trade on crude alone could cross US $five billion.
Non-US dollar and euro deals signify the shift in financial power structure away from France, Germany and the US troika. In fact, the time is ripe for major blocks like BRICS to either float a common currency or undertake trade and investments in respective currencies. In the evolving currency dynamics, there is no hard and fast rule to deal in US dollars or euros. The changing currency matrix has not impacted the British pound adversely before or after exiting EU as the UK had retained distinct identity of its currency unlike 28 other member countries. From India’s perspective, diversification of currency basket began a decade ago even though it has been painfully slow. The Reserve Bank of India (RBI) will have to continue with its policy of currency reforms setting the stage for fully convertibility. Currency swaps may not always be advantageous given unforeseeable circumstances in which the partner country may land. For instance, Japan had struggled too hard and for too long to get out of the protracted phase of economic stagflation. Tangoing with rupee or renminbi will provide renewed interest in Japanese markets that are undergoing a sea change after the dominance of the country’s electronics industry ended a decade ago. Given the expansion in trade, investment and strategic relations between India and Japan, it makes sense to sign the rupee-yen deal.