Japan and India are eyeing new currency swap agreement. This agreement will be focused on easing short term liquidity problems. The agreement will allow them to swap their currencies for US Dollars and tap into each other’s foreign exchange reserves. This move was decided upon after taking into account the extreme volatility of both the Japanese Yen and the Indian Rupee.
The negotiations about this agreement are in the final stages. The agreement is expected to be signed when the Japanese Prime Minister, Yoshiko Noda, visits India next week. The financial analysts are hoping that the agreement will help both the nations in stabilising their currencies, particularly in the current uncertain global economic environment. Overall, the emerging economies are totally shaken up by the Euro zone sovereign debt crisis. The currencies in these emerging economies get volatile when European banks pull out capital.
The dollar swap arrangement can help such economies as there is a promise of supply of dollars in an emergency. The previous currency swap deal that was signed between Japan and India in 2008 has expired. In addition to this swap arrangement with India; Japan is also planning a direct currency exchange agreement with China.
This will be aimed at cutting costs for companies and in boosting bilateral trade. The deal will allow companies to convert the Chinese and the Japanese currencies directly into each other. Currently, firms in both the countries need to buy US Dollars before converting them into the desired currency, which is leading to extra costs.