After inking a $15 billion currency swap deal with Japan last month, there was a buzz that India might go for similar agreements with other countries having large foreign exchange reserves like China. However, the Finance Ministry has ruled out such deals with any other country in the immediate future.
A finance ministry official told Business Standard: “There have been suggestions that India enters into a currency swap with China the way we did with Japan. However, as of now there is no plan to enter into a currency swap with any other country.”
For political and strategic reasons also, it was not appropriate to enter into that kind of deal with China, said another official.
According to Srikanth Kondapalli, chairperson, Centre for East Asian Studies in Jawaharlal Nehru University, there is a lack of mutual trust between China and India, one of the reasons that hampers a swap.
| Natins having currency swap deals with China | |
| Pakistan | Hong Kong |
| Argentina | Japan |
| South Korea | Uzbekistan |
| Indonesia | Thailand |
| New Zealand | Turkey |
| Malaysia | Singapore |
| Belarus | Kazakhstan |
One of the officials said $15 billion currency swap deal with Japan is enough. “We can explore it with other countries at a later stage, if required, but there is no immediate need. We will have to see which countries have a dollar surplus,” he said.
Anis Chakravarty, director, Deloitte, Haskins and Sells, said India’s trade dynamics with China and Japan are completely different.
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With Japan, the currency swap makes a sense because we are working with the country on many projects, an official in finance ministry said, adding most of our trade with China was in raw material and small cost final products.
According to Sridhar Venkiteswaran, executive director, Avalon Consulting, Japanese yen is a globally traded currency, unlike Yuan, so it makes sense to go for a swap with Japan instead of China. “Until we have significant business with China, a swap won’t work”.
In swaps, one central bank could borrow a currency from another, offering an equivalent amount of its own as collateral.
China has swap deals with ASEAN countries. Besides, it has also recently concluded such a deal with Pakistan. “China has investment in those countries”, said Venkiteswaran.
According to Kondapalli, China has only miniscule investment in India, it just gives credit in the form of low interest rate loans.” Indian investment in China is higher than vice versa.
According to the Department of Industrial Policy and Promotion China contributed just 0.06% to the total FDI inflows in India between April 2000 and October 2011.
“China finances the power sector in India. As coal production has fallen, the dealings with China have reduced”, said Venkiteswaran. He said, once coal production stabilizes, the then there will be demand for Yuan, and then a swap will make sense.
India’s total trade with China was worth $63.09 bullion in 2010-11, with balance in favour of China. It has emerged as the largest trading partner of India, if individual countries are considered and not bloc.
Since 2008, China has been on a currency swap agreement spree with various nations. At least 14 countries have already signed a bilateral currency swap agreement with China.
“Swap deal is just a marginal connect, in the long term, we need stability in the currency market”, said Kondapalli.
Rupee will stabilize against the dollar if disinvestment happens, noted an official. Of Rs 40,000 crore target set for disinvestment this fiscal, only a little above Rs 1,100 has materialised.
The country’s foreign exchange reserves dipped to a 13-month low to $293.5 billion for the week ended January 6, 2012, down by $3.1 billion from the previous week.
According to economists, intervention by the central bank in the foreign exchange market to arrest the fall of the rupee has been the main reason for the drop in foreign currency assets. RBI has been selling dollars in the foreign exchange market in order to prevent sharp fall in the currency of Asia's third-largest economy.
Indian currency has depreciated 13.93% against the dollar as on January 13, 2012 compared to its value against the greenback as on March 31, 2010. In between, it had depreciated as high as 20.13% compared to the last day of 2010-11.