The finance ministry has ruled out a currency swap deal with China for now. After India inked a $15-billion currency swap deal with Japan last month, there was a buzz that the government might go for similar agreements with countries having large foreign exchange reserves, such as China. A 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 trust between China and India, one reason that hampers a swap. (CURRENCY FLOWS)
An official said the $15-billion currency swap deal with Japan was 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 were completely different. “With Japan, the currency swap made sense because we are working with the country on many projects,” an official in the finance ministry said. “Most of our trade with China was in raw material and small-cost final products.”In swap agreements, one central bank could borrow a currency from the other, offering an equivalent amount of its own as collateral.
According to Sridhar Venkiteswaran, executive director, Avalon Consulting, the Japanese yen is a globally traded currency, unlike the Chinese 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,” he said. China has swap deals with Asean countries. Besides, it recently concluded such a deal with Pakistan. “China has investment in those countries,” said Venkiteswaran.
According to Kondapalli, China has minuscule investment in India; “it just gives credit in the form of low-interest rate loans.” Indian investment in China is much higher. According to the department of industrial policy and promotion, China contributed just 0.06 per cent to the foreign direct investment 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 stabilised, there would be demand for the yuan and then a swap would make sense.
India’s trade with China was worth $63.1 billion in 2010-11, with the balance in favour of China. It has emerged as the largest trading partner of India, if individual countries are considered. Since 2008, China has been on a currency swap agreement spree with various nations. At least 14 countries have signed a bilateral currency swap agreement with China.
China has the highest forex reserves in the world — worth $3,201 billion — and Japan has forex reserves of $1,295 billion, according to the latest data. “A swap deal is just a marginal connect. In the long term, we need stability in the currency market,” said Kondapalli. The rupee would stabilise against the dollar if disinvestment happened, said an official. Of Rs 40,000 crore target set for disinvestment this financial year, only a little above Rs 1,100 crore has materialised.
The country’s foreign exchange reserves dipped to a 13-month low to $293.5 billion for the week ended January 6, 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 to prevent a sharp fall in the rupee. The Indian currency has depreciated 13.9 per cent against the dollar as on January 13, compared with its value against the greenback as on March 31, 2010. In between, it had depreciated as much as 20.1 per cent against the value on the last day of 2010-11.