Currency sweatshirts between countries work in the same way, except that in a bilateral agreement, the two countries are expected to play a rich uncle to each other. “This swap agreement reflects in particular the depth of mutual trust and understanding, personal relationship and warmth between the two leaders that have been built for many years,” the statement continued. A bilateral exchange swap is an open line of credit from one country to another at a fixed exchange rate. The country that makes use of this loan pays interest to the country that provides it, at a reference rate such as the Libor (London Inter Bank Rate). India and Japan have also signed similar agreements in the past, but this is the largest bilateral agreement of its kind in the world. On March 19, 2020, the United States opened temporary swap agreements with central banks in Australia, Brazil, Denmark, South Korea, Mexico, Norway, New Zealand, Singapore and Sweden, worth a total of $450 billion for at least six months. “This new swap agreement was intended to bring more stability to India`s foreign exchange and capital markets,” the finance minister tweeted yesterday, adding that it represented “a 50% increase” over the last currency swap agreement between India and Japan. Japan had proposed a $50 billion swea-currency in 2013 and another for $3 billion in 2008. At a time when rupees were depreciating by more than 13% against the dollar (so far), India and Japan yesterday concluded one of the largest bilateral currency exchange agreements in the world. This will not only strengthen bilateral financial cooperation between the two countries, but also stabilize the rupees and reduce the current account deficit (CA). The facility will serve as the second line of defence for the rupees after the RBI`s $393.5 billion in foreign exchange reserves.
However, foreign exchange reserves, which provide the central bank with a buffer to cope with the high volatility of foreign exchange markets through controlled sales, have continued to decline. According to the RBI, foreign exchange reserves decreased by $942 million in the week ended October 19, after posting a sharper decline of $5.14 billion the previous week. The currency swap contract not only supports the rupees, but also increases foreign exchange reserves. A swap agreement with Japan provides considerable comfort to India, as Japan is the second largest holder of dollar reserves in the world after China and is on fat crates of more than $1.250 billion. Therefore, while Japan is unlikely to apply for a dollar loan to India, India can use such credit at very low interest rates. The Reserve Bank of India (RBI) and the Bank of Japan signed a bilateral swap agreement (BSA) on Thursday worth up to $75 billion. India and Japan signed a $75 billion bilateral foreign exchange agreement in October 2018. The currency swap agreement will allow the Indian Central Bank to obtain up to $75 billion in yen or dollars in credit from the Japanese government whenever it needs the money. The RBI can sell these dollars (or yen) to either importers to pay their bills or to borrowers to repay their foreign loans. The RBI can even hold on to the money to support its own foreign exchange reserves and to defend it in rupees. If the Central Bank of Japan were to knock on India`s doors for a $75 billion loan, the RBI will also be required to make it available to Libor on its own reserves.