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PM MODI’S 2018 JAPAN VISIT
- India and Japan have signed a $75 Billion bilateral currency swap Agreement
- Will help in bringing greater stability in foreign exchange and capital markets in the country.
A HUGE AGREEMENT
Commenting on the development, Economic Affairs Secretary S C Garg said in a tweet: “Bilateral swap arrangement with Japan for USD 75 billion is one of the largest swap arrangements in the world.
CURRENCY SWAP WAS IN THE NEWS
Few days ago, Japan and China agreed a currency swap of up to $30 billion.
SO WHAT IS CURRENCY SWAP AGREEMENT?
A currency swap involves exchanging principal and fixed interest payments on a loan in one currency for principal and fixed interest payments on a similar loan in another currency. Basically they will just their local currencies.
EXPLANATION
Imagine that I am an Indian businessman and I need US $1million for five years. I thought I would borrow from a U.S bank But there is a usual problem- that if the rupee’s value falls steeply, my debt burden from this loan will go up in rupee terms. One million Dollars today is equal to Rs 7 crores (at $1 =Rs 70). If rupee value falls to Rs 100/1$, I have to pay Rs 10 crore at maturity.
A SOLUTION
- I came to know of a U.S businessman named Steve who needed 7 crore rupees
- This give me an opportunity. If he and me agrees, I will give him my Rs 7 crore and he will give me $1 million. Both amounts are equal.
THE INTEREST
Here, I should give him an interest rate prevailing at the US markets in dollars (say 6%). Similarly, Mr Steve has to give me the Indian interest rate (say 8%) in rupees. This we will do for five years.
BRILLIANT
At the end of the fifth year, Steve will give me back Rs 7 crores and I will give him back the $1 million. Here, we simply re-exchanged the original principal amounts. This arrangement is called currency swap. There occurred an exchange or swap of principals in terms of two currencies.
COUNTRIES DO IT TOO!
- Currency swap is usually done by business firms and sometimes by governments. Mostly they are tailor made arrangements or done to suit for each entities.
- The main advantage of currency swap is that it reduces foreign exchange risks. Similarly, it reduces interest rate risk also.
BENEFITS
- Boost Indo-Japan relatios
- Stabilize our rupee to some extent
- Help with our current account deficit
- Will help avoid disputes between India and Japan with regards to loans
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