Japan, India to swap currency

India, probably the world’s hottest growth market, and Japan, rich with capital at close-to-zero interest rates, warmed up to a cosy economic pact on Wednesday under which Tokyo could lend easy cash piles to cushion India in a volatile global currency market.

Strong in engineering power and capital, Japan is courting infrastructure-hungry India with its huge domestic market and abundant labour in a special deal — reminiscent of the Indo-Soviet rupee trade — worked out during Prime Minister Shinzo Abe’s visit to New Delhi.

In a world market in which risk-prone hedge funds have sucked out cash, Japan’s surplus money could help India avoid a crisis of the kind East Asian nations faced in the late 1990s. The pact might also open a new window for Indian corporates to raise yen denominated loans at extremely cheap rates. The Japanese central bank has kept its interest rates at nearly zero over the last 10 years. Indian firms could also hope to raise capital and list on Japanese stock exchanges, Finance Ministry sources said.

“A basic agreement has been reached on bilateral currency swap in response to short-term liquidity crunch,” Abe told industry captains at a meeting organised by FICCI, Assocham and the CII. Abe also favoured early conclusion of the Comprehensive Economic Partnership Agreement and tripling bilateral trade to $20 billion in the next three years.

Currency swaps involve a dedicated exchange of cash flows insulated from global intermediaries. The agreement would effectively mean Japan will accept rupees and give India US dollars up to a stipulated limit, while India will take yen and send US dollars to Japan if speculators seek to beat down their respective currencies. Japan’s finance ministry and the Reserve Bank of India have already completed two rounds of negotiations on the issue.

East Asian countries and Japan have already signed currency swap pacts, effectively to prevent a crisis that rocked the region in 1997 as many currencies went into a tailspin.

Commerce and Industry Minister Kamal Nath said the proposed Delhi-Mumbai Industrial Corridor with Japanese help was expected to transform India’s economic landscape and asked Japanese business leaders to inspire small and ancillary companies to invest in India.

Japan’s Hitachi Ltd is planning to invest in India’s nuclear energy sector. “We are looking at it,” Kazuo Furukawa, president and CEO of Hitachi, told reporters.

Automobile major Toyota Motor Corporation is also planning to roll out a small car in India in the next two years and set up a second manufacturing unit in Bangalore.