Tokyo:  Japan is poised to unveil a currency-swap line with India in its second international financial agreement with top Asian powers this week.

Finance Minister Jun Azumi told reporters yesterday in Tokyo that Japan is negotiating an agreement with India, the third- largest economy in Asia behind China and Japan. The deal is likely to be unveiled during a trip by Prime Minister Yoshihiko Noda to India that started yesterday, with the amount of the swap line about $10 billion (Dh36.78 billion), a Japanese government official said on condition of anonymity.

Japan agreed with China two days ago to promote direct trading of the yen and yuan without using dollars and start purchases of Chinese bonds for its foreign-exchange reserves. The deal with India would expand the ability to respond to financial shocks as Prime Minister Manmohan Singh's administration contends with a slump in the rupee that risks stoking inflation.

"It's like an insurance cover or padding to the foreign- exchange reserves in a crisis," said Dharmakirti Joshi, a Mumbai-based economist at Crisil Ltd., the local unit of Standard & Poor's. "It will help in times of dollar shortage."

The rupee has plunged about 15 per cent against the dollar this year, the worst performance in Asia, after foreign investors sold shares worth $561 million as growth slows and Europe's protracted sovereign-debt crisis roiled global financial markets. A weakening currency adds to the cost of imported goods in a nation that has the fastest inflation among the Bric (Brazil, Russia, India and China) nations, with the benchmark wholesale-price index rising more than 9 per cent in each of the past 12 months.

Pradeep Unni, a senior analyst at Richcomm Global Services DMCC in Dubai, said the current swap deal along with the other efforts recently undertaken by the RBI is likely to arrest the current weakness in the rupee, which is the worst performing currency in Asia and the third worst performing currency in the world. "In the near term, these efforts may turn the rupee stronger against the US dollar and a host of other currencies, including the UAE dirham," he said. "As far as the UAE is concerned, the Indian rupee's gain may reduce partly the inflow of funds to India. For the past two weeks, expatriates in the UAE and other Gulf states have been enjoying the great exchange rate."

Smaller holding

While India's foreign-exchange reserves have risen $4.8 billion in the past year to $302 billion, the country's holdings are smaller than those of China, Japan, Taiwan, South Korea and Hong Kong. Last week, the Japanese government said Asia's two largest economies will promote direct trading of the yen and yuan without using dollars and will encourage the development of a market for companies involved in the exchanges. Japan will also apply to buy Chinese bonds next year, allowing the investment of renminbi that leaves China during the transactions, the Japanese government said.

Mutual agreement

India and Japan have previously supported each other with similar arrangements. In 2007, the two nations agreed to support each other in the event of a run on their currencies in the first such foreign-exchange accord for the South Asian nation.

Under the plan, Japan would lend dollars and other currencies should India find its foreign-exchange reserves insufficient to stem a fall in the rupee.

Japan has also deployed some of its reserves, the world's, for aiding Japanese companies in making overseas acquisitions.