The decision to expand bilateral currency swap was taken during a meeting between Prime Minister Manmohan and Japanese Deputy Prime Minister Taro Aso on the sidelines of the summit of the Group of 20 industrialised and emerging economies here.
The two governments expect that this will contribute to the stability of global financial markets including emerging economies, according to a joint statement after the meeting.
The two sides also felt that it was important to continue reforms in financial and investment sectors for promoting stable and long term capital inflows into India. Today's decision came a day after Singh called for extensive consultations within the G-20 grouping to tackle the current currency crisis. The existing swap facility of 15 billion USD was agreed last year.
According to Planning Commission Deputy Chairperson Montek Singh Ahluwalia, the currency swap arrangement and plans by BRICS to launch a 100 billion USD Contingent Reserve Arrangement(CRA) would be to build a "second line" of defence for the rupee".
Ahluwalia, who is Singh's Sherpa at the Summit, made it clear that India does not see an immediate need to draw down on the facility. The swap facility can be used when the reserves dip beyond a comfortable level, he said.
India currently has around USD 280 billion of foreign exchange, a reserve that is enough to cater to around seven months of the country's annual import bill, he added.
Analysts said the enhanced Yen swap facility is apparently aimed at improving sentiment on the exchange rate and could send a signal to the markets that India has enhanced ability to defend its exchange rate, if the need arises. The rupee had lost one-fifth of its value to a dollar this year.
Prime Minister Singh had said that India has been affected by currency volatility in the past few weeks and was taking steps to finance the current account deficit (CAD) in an environment that is seen to be friendly for stable foreign capital flows.
India and Japan also reiterated the importance of continued reforms in financial and investment sectors for promoting stable and long term capital inflows into India. The two governments believe that these policy measures will strengthen the bilateral financial cooperation between Japan and India, the statement said.