How Japan Saved the Rupee

Though little appreciated by most Indians, one of the most important actions taken by the Japanese government of Shinzo Abe in support of the New Delhi regime he is wooing was to save the rupee in the fall of last year.

Already fading from public memory, it should be recalled that the Indian rupee fell off a cliff between May and August last year. It fell from about 56 to the dollar to nearly 69, its lowest ever value against the greenback. Forward markets were flashing red, and there was talk of the rupee falling to a hundred to the dollar by year’s end.

This pricked ears in Tokyo, where the Abe government was already fashioning a policy for the strategic pairing of India and Japan. The central bank of Japan wrote a letter in late August to Raghuram Rajan, at that point the chief financial advisor of the finance ministry, offering to help India save the rupee. Before he could accept, Rajan was elevated to the governorship of the Reserve Bank of India. But one of his first actions as RBI head was to send a note to his Japanese counterpart, Haruhiko Kuroda, accepting his offer of help.

The actual act was simplicity itself. At the St. Petersburg G-20 summit in the first week of September, Prime Ministers Manmohan Singh and Abe agreed that a small existing currency swap would be expanded to $50 billion. In effect, India was being allowed the right to tap into Japan’s massive three trillion dollar foreign exchange reserves whenever it felt the need — the $50 billion limit was a consequence of Indian regulatory caps, not Japanese unwillingness to offer more.

As a Japanese official said, the currency swap killed the growing tide of bearish sentiments against the rupee and speculation of a further rupee slide. The rupee’s fall had also been partially arrested by Rajan’s unusually policy-heavy inaugural statement as central banker — hitting the ground running is something he shares with Kuroda.

The actual currency swap was not formalized until January this year by the two central bankers. More noteworthy, it has never been used by India. A suitable reminder of how speculation and market sentiment are very much mind games, the very idea of the currency swap and Japanese backing scared off speculators. This in turn gave Rajan the type of breathing space he needed to enact the policies to swing the rupee around.

New Delhi’s ruling circle, who like to presume India can do everything on its own and without foreign assistance, have been relatively mealy-mouthed in giving Japan its due. And the Japanese are too pilot and too strategically-minded to make a noise themselves.

Singh, an ardent admirer of Japan, might have felt some deja-vu. After all, in 1991 when the Indian economy was facing a meltdown, the emergency international funding that helped Singh affect a turnaround was led by $300 million from Tokyo.

Copyright © 2014 the Hindustan Times.