NEW DELHI/ ST PETERSBURG: The rupee surged 87 paise on Friday after Japan extended support to India's fight against currency volatility by agreeing to more than treble the scope of the bilateral swap arrangement to $50 billion.
The facility between the Reserve Bank of India and the Bank of Japan enables both countries to swap Japanese yen or the Indian rupee for US dollars in an unforeseen situation. It is essentially an arrangement to tide over short-term foreign exchange crunch. The deal was first signed in 2008 and was limited to $3 billion, but the size was increased to $15 billion when the arrangement was renewed in 2011.
The rupee opened at 66 up from its previous close of 66.12 against the dollar and gained during the day to close at 65.25 against the dollar. "The swap arrangement with Japan was a positive factor for the rupee. This supplements RBI's earlier measures whereby it has agreed to swap dollars raised by banks through long-term non-resident deposits and borrowings at 350 basis points," said Ashish Vaidya, head of fixed income, currencies and commodities, at UBS India. He added that these measures under which RBI borro"The two governments expect that this will contribute to the stability of global financial markets, including emerging economies," India and Japan said in a joint statement after a meeting between Prime Minister Manmohan Singh and Japanese deputy PM Taro Aso on the sidelines of the G-20 summit.
Forex dealers said that the tide appears to have turned for the rupee and this could result in unwinding of long dollar positions. But uncertainty continues to hang over the market in respect of the situation in Syria and the outcome of the meeting of the US Federal Reserve on September 17. "A reduction in the Fed's bond buyback has already been factored in. The question now is how much?" said a dealer.
Planning Commission deputy chairman Montek Singh Ahluwalia , however, reiterated that India has "adequate" foreign exchange reserves to defend its currency and ruled out taking any external assistance unless there is a "radical" change in the situation. "With $280 billion in reserves, I don't think we will be drawing on currency swap arrangements unless there is a radical change in the situation," he said. The latest deal with Japan comes a day after BRICS members - Brazil, Russia, India, China and South Africa - agreed on a $100 billion currency swap facility.
Emerging market currencies, such as the Brazilian real, the rupee and the South African rand have been hit hard by the volatility in currency markets. The fear of a withdrawal of the stimulus by the US Federal Reserve later this month has resulted in outflow of dollars from these countries with the poor economic performance in countries such as India adding to the pressure.
Through the swap arrangements, the government is trying to send a message to the markets that apart from the large foreign exchange reserves, of a little under $280 billion, it has arrangements to deal with a flight of funds.ws dollars will complement its swap facility with oil companies where it lends dollars.
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