India eyes currency swaps as dollar gets hot; may use gold reserves to trim CAD

The government has set up a task force to explore the possibility of using the rupee for trade with its major trading partners and look into the pros and cons of such a move.

The purpose of the task force is limited to examining swap of national currency for trade, which is distinct from currency swap agreements between central banks, commerce secretary S R Rao has clarified.

Union minister for commerce and industry Anand Sharma who yesterday announced the setting up of a task force on currency swap arrangements for trade today said the government is also toying with the idea of using its gold reserves to liquidate its current account deficit.

The task force to be set up within the department of commerce will also include representatives of EXIM Bank, ECGC and SBI,

 ''In view of the rising trade deficit and consequent current account deficit, a need has been felt to examine the role of currency swap arrangement / agreements in order to suggest a possible mechanism to address the issue,'' the commerce ministry said in a release. ''It has been decided to constitute a task force on currency swap arrangements / agreements,'' it added.

The terms of reference of the task force include:

• To examine various types of currency swap agreements/arrangements and their implication for India's trade and financial system;
• To study the pros and cons of currency swap agreement / arrangement for India's trade; and
• To explore the possibility of currency swap arrangement / agreement between India and identified countries and make recommendations accordingly.

The task force headed by additional secretary of the trade policy division in the department of commerce, will representative of the department of economic affairs and the department of financial services not below the rank of joint secretary as members.

Other members include economic adviser in the department of commerce, representatives of the Reserve Bank of India, State Bank of India and EXIM Bank, industry representative from FICCI and CII, representative from EEPC and FIEO and any other member co-opted by the chairperson of the task force.

Joint secretary in the trade policy division of the commerce ministry will be member secretary,

The task force has been asked to submit its recommendations to the department of commerce in four weeks.

Sharma said the government was also evaluating the idea of monetising 500 tonnes of gold reserves with the Reserve Bank of India to help contain the widening current account deficit (CAD).

"It is for the banking secretary, bankers and the RBI to see how you can monetise gold, (from) the country with over 31,000 tonnes of declared gold. That is the declared part. So even if 500 tonnes is monetised, then in today's value, I think it takes care of CAD," he said at a meeting of the Board of Trade.

He, however, added that this "decision is beyond me... But I am just pointing in that direction. Can we do something there? I think we can, because you have to think out of the box."

At current market rates, 500 tonnes of gold is valued at about $25 billion, which is only a fraction of the country's trade deficit.

India's CAD, which roughly indicates the excess of imports of goods, services and transfers over exports, touched a record 4.8 per cent of GDP, or $88.2 billion, in 2012-13.

The government hopes to bring down CAD to levels around 3.7 per cent of GDP, or $70 billion, in the current financial year.