In what will put overwhelming dollar power in India’s hands, the government is considering, for the first time, a currency swap arrangement with the United States Federal Reserve Bank or the European Central Bank (ECB), the central bank for Europe’s single currency.

Such a deal — essentially a stand-by facility — will allow the Reserve Bank of India to get billions of dollars or euros by swapping equivalent rupees at a pre-determined price. It is seen as an additional cushion to India’s still comfortable foreign exchange reserves position.

A currency swap is an arrangement between two parties to exchange a specified amount of each other’s currency during a given time-period at mutually acceptable terms. It can either be a straight cash swap or can even be negotiated as a government securities swap to ensure that it does not affect liquidity in the domestic market.

“It is far cheaper than other sources of credit,” a senior Finance Ministry official told The Sunday Express. He said the government is assessing its requirements before it negotiates a swap arrangement with the US Fed and the ECB. The swaps will not only boost sentiments in the foreign exchange market, but will also give confidence to companies requiring dollar funding. “You put them up, so that you don’t use them. They show you have overwhelming power,” another official added.

In the backdrop of the global financial turmoil and the resulting credit crisis, central banks of emerging economies such as Korea, Mexico, Brazil and Singapore had on October 30-31 negotiated temporary swap lines of credit with US Federal Reserve. This was meant to mitigate the difficulties in getting dollar funding in their countries which otherwise had fundamentally sound and well-managed economies.

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