Why currency swaps may not save us

The government’s currency swap agreement efforts with major trading partners are implementable in the long run.  Currency swap agreements enable partners to exchange local currencies at a predetermined exchange rate. But it will take time lag for currency swap agreements to be effective as it need consultation with partners. Internationally, governments are on a risk averse mode, fearing a big crisis. Hence, credible foreign exchange holding countries may not be generous to engage in bilateral currency protection measures with India seriously.

There are already a large number of currency swap agreements especially those initiated by China. Beijing was always skeptical about the dominance of dollar and it hence launched two sets of measures to reduce the dominance of dollar and to promote renminbi. First were the currency swap agreements where local currencies were swapped. Second was the promotion of bilateral trade in local currencies.

Trading in local currencies is more rewarding in protecting the rupee. Here, trade is settled in local currencies. This will reduce the dependence on dollar. China has strategically promoted local currency trade settlement. It has local currency trade settlement with Russia, Japan and with many other countries. India is always reluctant to adopt such dollar reducing but renminbi promoting programmes by Beijing.

In reducing dollar dependency and thus reducing rupee volatility, local currency trading is more helpful than currency swaps. The Commerce Ministry has suggested local currency trade promotion two days back along with currency swap. But both measures will take at least six months to yield reward from starting of negotiations. Similarly, many partners may not be interested in engaging bilateral currency protection measures given the inability of the government to save the currency on our own. The rupee should be protected from the sudden fall immediately. Here other quick result measures like limited foreign exchange intervention should be the priority. Long run measures are good, but priority should be given to quick rewarding measures.