India today suggested creation of currency swap lines among G20 nations to mitigate risks on emerging markets as the US gradually winds down its stimulus programme.
The US Federal Reserve's Quantitative Easing programme has impacted currencies, especially those of emerging economies including India.
Noting that the QE policy has had an impact on the "the currency markets of many of the emerging market economies," Finance Secretary Arvind Mayaram has suggested currency swap lines among G20 nations.
"We should also be discussing G20 driven collaborative solutions which would reduce the impact of the possible near term repricing.
"... In order to ensure that the growth outcomes are still achieved, are there solutions that G20 can explore? Are swap lines a solution? Let us get the IMF to analyse whether it is so," Mayaram said while making an intervention at the G20 Deputies Meeting here.
He said that the International Monetary Fund (IMF) could be asked to look at the cost of the swap and compare those to the benefits.
"It is possible that the swap facility may never be used as it more of a confidence building measure, rather than actual ammunition.
"The benefits to the global financial system could potentially be large as it would reduce the amount of self-insurance that countries need to do," Mayaram said.
Under a currency swap arrangement, specific amounts of currencies are exchanged between the participating countries/entities to hedge exchange rate risks.
"... If the swap facilities do get used, the benefits would include a reduction in the negative shock to EM and global GDP," he said.
According to Mayaram, the decision on the exit from the QE programme that came in after the US Federal Reserve's meeting yesterday had an impact on the currency markets of many of the emerging market economies.
"The strength of G20 lies in taking international collaborative actions and not limiting to the individual country growth strategies," he said.
The US Federal Reserve has decided to continue with near-zero interest rate regime and has cut down on asset purchases. However, it has not given a specific time frame on when the interest rates could be hiked.
