India, Japan agree $15 billion currency swap as rupee swoons

NEW DELHI (Reuters) - India and Japan have agreed to a $15 billion currency swap line, Japan’s Prime Minister Yoshihiko Noda said on Wednesday, in a positive move for the troubled Indian rupee, Asia’s worst-performing currency this year.

A previous $3 billion dollar to local currency arrangement between the two countries expired in June.

“Amid global economic uncertainties, ensuring the stability of the financial markets is all the more important for the stable economic development of the two countries,” a joint statement by Noda and Indian Prime Minister Manmohan Singh said.

Noda was on a one-day trip to India to boost financial cooperation between Asia’s second- and third-largest economies, which are also working more closely on security issues and seeking a deal to allow India access to Japan’s civil nuclear technology.

Earlier, he called for greater Indo-Japanese economic relations, after India’s trade minister said bilateral commerce would only reach $25 billion by 2014.

Despite the low trade volume, Japanese companies are increasingly viewing India as a long-term play, with a large and youthful population set to drive growth in coming years.

“We can and should step up economic relations between the two countries,” Noda said.

India and Japan enjoy warm diplomatic ties, but at a paltry $15 billion, bilateral trade in 2010 was less than 5 percent of Japan’s commerce with China.

“I believe that India’s middle class will be the driving force if the manufacturing sector grows in India ... we can achieves greater trade volumes,” Noda said at a meeting with business leaders in Delhi.

The currency swaps are expected to support the Indian rupee as it continues to weaken against the greenback and Europe’s sovereign debt crisis hits India’s exports.

Arjun Asrani, a former Indian ambassador to Tokyo, said Delhi still remembered Japan’s help during a severe currency crisis in 1991, when foreign reserves dwindled to $1 billion.

“At that time the only country that came to our rescue was Japan, and Japan has seen how much gratitude it created,” he said.

This time round India is sitting on about $300 billion of reserves, equivalent to eight months of imports.

Japan’s dollar-swap arrangement with India follows a similar agreement with South Korea in October. [ID:nT9E7KQ01C] and is similar to the South East Asia-wide Chiang Mai swap initiative.

“All of this is very timely, giving confidence that India does have access to foreign exchange liquidity should they need it,” said Rajiv Biswas, IHS Global Insight’s chief Asia economist.

Although India’s reserves are comfortably high, it is suffering an industrial slowdown that has raised concern about its twin fiscal and current account deficits.

Alicia Garcia-Herrero, chief economist for emerging markets at BBVA bank, said $137 billion of Indian debt maturing in the next 12 months could create further currency volatility.

“If we add to this the still huge uncertainty on the resolution of the European debt crisis, it seems clear that India can benefit from an additional cushion against capital outflows,” she said.

Garcia-Herrero said the deal was a positive sign of how Asia was dealing with economic instability without turning to the International Monetary Fund.

“After the horrible experience of the Asian crisis, insurance has always come within the region,” she said.

INDUSTRIALIZING INDIA

Noda said Japan would invest $4.5 billion in a 1,483 km (920 mile) industrial corridor stretching from New Delhi to the financial hub of Mumbai in the west. He also promised loans in yen worth $1.7 billion for two projects, including expanding Delhi’s metro railway.

The industrial corridor includes plans for 24 new cities. Indian Trade Minister Anand Sharma earlier said that overall more than $100 billion would be invested in the project, which could help transform India’s economic landscape and give its choked, teeming cities room to breathe.

“One big objective of the industrial corridor is to create a manufacturing base for Japanese companies to export to Europe and Africa,” said economic diplomacy expert Robinder Sachdev of think-tank Imagindia.

In the joint statement Noda and Singh said talks on civil nuclear sales were going “in the right direction” and that progress was made on Wednesday. They did not give a timeline for further negotiation.

The talks had been slowed by the Fukushima disaster this year. Japan also wants India to commit to a moratorium on nuclear weapons tests.

Hours before Noda left for India on Tuesday, Japan’s security council relaxed a decades-old arms exports ban. India was the world’s top weapons importer last year.