Japan Set to Unveil $10 Billion India Currency Swap Deal During Noda Visit

By Kyoko Shimodoi and Unni Krishnan - Dec 27, 2011 12:33 PM GMT+0700

Japan is poised to unveil a currency-swap line with India in its second international financial agreement with top Asian powers this week.

Finance Minister Jun Azumi told reporters today in Tokyo that Japan is negotiating an agreement with India, the third- largest economy in Asia behind China and Japan. The deal is likely to be unveiled during a trip by Prime Minister Yoshihiko Noda to India that starts today, with the amount of the swap line about $10 billion, a Japanese government official said on condition of anonymity.

Japan agreed with China two days ago to promote direct trading of the yen and yuan without using dollars and start purchases of Chinese bonds for its foreign-exchange reserves. The deal with India would expand the ability to respond to financial shocks as Prime Minister Manmohan Singh’s administration contends with a slump in the rupee that risks stoking inflation.

“It’s like an insurance cover or padding to the foreign- exchange reserves in a crisis,” said Dharmakirti Joshi, a Mumbai-based economist at Crisil Ltd., the local unit of Standard & Poor’s. “It will help in times of dollar shortage.”

The rupee has plunged about 15 percent against the dollar this year, the worst performance in Asia, after foreign investors sold shares worth $561 million as growth slows and Europe’s protracted sovereign-debt crisis roiled global financial markets. A weakening currency adds to the cost of imported goods in a nation that has the fastest inflation among so-called BRIC nations, with the benchmark wholesale-price index rising more than 9 percent in each of the past 12 months.

Previous Arrangement

While India’s foreign-exchange reserves have risen $4.8 billion in the past year to $302 billion, the country’s holdings are smaller than those of China, Japan, Taiwan, South Korea and Hong Kong.

India and Japan have previously supported each other with similar arrangements. In 2007, the two nations agreed to support each other in the event of a run on their currencies in the first such foreign-exchange accord for the South Asian nation. Under the plan, Japan would lend dollars and other currencies should India find its foreign-exchange reserves insufficient to stem a fall in the rupee.

Japan has also deployed some of its reserves, the world’s second biggest behind China’s, for aiding Japanese companies in making overseas acquisitions.

Direct Trading

Earlier this week, the Japanese government said Asia’s two largest economies will promote direct trading of the yen and yuan without using dollars and will encourage the development of a market for companies involved in the exchanges.

Japan will also apply to buy Chinese bonds next year, allowing the investment of renminbi that leaves China during the transactions, the Japanese government said in a statement after a meeting between Prime Minister Yoshihiko Noda and Chinese Premier Wen Jiabao in Beijing Dec. 25. Encouraging direct yen- yuan settlement should reduce currency risks and trading costs, the two governments said.

China is Japan’s biggest trading partner with 26.5 trillion yen ($340 billion) in two-way transactions last year, from 9.2 trillion yen a decade earlier. The pacts between the world’s second- and third-largest economies mirror attempts by fund managers to diversify as the two-year-old European debt crisis keeps global financial markets volatile.

To contact the reporters on this story: Kyoko Shimodoi in Tokyo at kshimodoi@bloomberg.net; Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net.

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net