Currency Swapping

I believe, those who are reading this must have come across “Currency Swapping” very frequently in recent past. This phrase is all over in news at least when it comes to Indian economy as a short term measure taken by Reserve Bank of India (RBI) to set a check on its increasing Current Account Deficit (CAD) and cater the rising demand of US dollar, which has already shown its positive impact on Indian economy and give a sign of relief to its policymakers, of course in short run. But, have you ever think, what this economic phrase means. By taking a glimpse someone align his/her thoughts and can easily say “exchange of currencies between concern parties (not necessarily countries)” and to some extent s/he is correct as well. But still there are few doubts or some questions which put our mind in strain.

What is Currency Swapping? And what are its impacts on our economy?

Let me take an example to make you understand in effective way. You must have heard of “India inked agreement of worth $50 billion Currency Swapping with Japan and in talk with more than half a dozen of emerging market”. So what is this all about? This facility between Reserve Banks of India and Bank of Japan enable both the parties to swap the Indian rupee or Japanese Yen for US dollars in an unforeseen situation at certain fixed/floating rate (depends on negotiation between parties) up to the maximum limit of $50 billion. The interest payable by both the parties would be in dollars and at maturity principle amount would be exchanged back. This shoot up the Forex Reserve of dollar with RBI, bridges the Current Account Deficit and ease the demand of USD in domestic market.  And helps Indian Rupee to strengthen against USD.

RBI also opened up swap window with Indian Oil Companies to meet their demand for dollars which will be ending sometime in next year. Being an importer of Crude oil, Indian Oil Companies needs dollars to clear their dues. But increased demand for dollar and continually weaken of rupee made the scenarios even more worsen for Oil sector to meet their targets.  In order to tackle Oil sector’s dollar demand, Governor Raghuram Rajan came up with scheme of currency swapping with Oil Companies in which RBI cater increasing demand by providing adequate resources (dollars) to finance Oil Companies and as per the latest progress will accept the dollar repayments by oil marketing companies in rupees if time calls for it.

In an another move, RBI urged banks to raise fund by borrowing through two special windows for swapping which will be ending on 30^th November, Foreign Currency Non Resident (FCNR)  deposits and Overseas foreign currency. The special window allow banks to swap FCNR dollar funds for a minimum period of three years or more, at a fixed rate of 3.5 percent for the tenure of deposit.  The RBI also allowed banks to borrow up to 100 percent of tier I capital from overseas, which later on can be swapped with RBI at a concessional rate of 1 percent below the swap rate prevailing in market. And this move RBI has fetched 17.4 billion dollars in its basket.

RBI has taken various measures, one of them were  is “Currency swapping” to set a check on free falling India Rupee and to bridge Current Account Deficit. And this measure has aided RBI at least in short run. Green shots have been seen with easing demand for dollars and with appreciation in Rupee against dollar.