India and Japan have expanded the maximum amount of the bilateral swap arrangement (BSA) between the two countries to $50 billion, from its original size of $15 billion.
Bank of Japan (BoJ) and the Reserve Bank of India (RBI) on Friday signed the expanded bilateral swap agreement designed to help each other in the event of a forex crisis or a short-term liquidity crisis.
The agreement, signed by BoJ governor Haruhiko Kuroda and RBI governor Raghuram G Rajan, is effective for a three-year period from 10 January 2014 till 3 December 2015, RBI said in a release.
The BSA, which will address possible short-term liquidity difficulties and supplement the existing international financial arrangements, is one of the efforts in strengthening bilateral cooperation between Japan and India.
This expansion of the BSA will contribute to the stability of global financial markets including emerging economies, RBI said.
The expanded swap agreement will help India to ward off any adverse impact of the tapering of the US Federal Reserve's bond-buying programme that begins this month.
The $10-billion a month reduction in Fed's bond buying to $75 billion from January on the back of improvement in the world's biggest economy will have a negative impact on dollar flows to emerging economies like India.
Meanwhile, India's commerce ministry has drawn up a list of 23 countries for trading in local currencies, in an effort to save the rupee from the rising dollar and to ease pressures of foreign exchange.
Under the swap trade arrangement, countries involved will trade in local currencies where they pay for exports and imports in their domestic units at pre-determined exchange rates instead of paying in US dollars.
The commerce ministry list includes oil exporting nations such as Angola, Algeria, Nigeria, Oman, Iran, Iraq, Venezuela, Qatar, Yemen and Saudi Arabia.
Meanwhile, India is expected to end the current financial year with a lower current account deficit of below 3 per cent of GDP, against the 4.8 per cent CAD projected earlier, the Reserve Bank of India (RBI) stated in its Financial Stability Report, released towards the close of 2013.