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U.S. Hesitant on India’s Currency Swap Proposal, Subbarao Says

The U.S. has reservations over India’s proposal for a currency-swap deal because the rupee isn’t fully convertible, Reserve Bank of India Governor Duvvuri Subbarao said today.

Indian officials had requested a dollar-rupee swap facility when Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben S. Bernanke visited the South Asian country in October, Subbarao told a gathering of businessmen in Mumbai.

“They didn’t say yes or no but the reservation they have against giving us a facility is that the rupee is not a fully convertible currency,” he said.

Currency-swap transactions typically ensure adequate supply of foreign exchange in times of liquidity crunch and stem volatility in the local currency. Following the credit crisis in the wake of Lehman Brothers Holdings Inc.’s collapse, the Fed had agreed in October 2008 to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore to unfreeze money markets.

South Korea, China, Japan and other Asian nations agreed in February 2009 to form a $120 billion pool of foreign-exchange reserves that can be used in swap deals by countries to defend their currencies in an expansion of efforts to battle the fallout from the global financial crisis.

India’s rupee touched a record low 57.3275 against the dollar in June after the nation’s current-account deficit widened to a record $21.8 billion in the first quarter. It weakened 4.1 percent this quarter, the worst performance among the major currencies in the region after Japan’s yen, according to data compiled by Bloomberg.

India is gradually moving toward capital-account convertibility, Subbarao said today, a measure that would enable free trading of the rupee. The RBI intervenes in the currency market to reduce volatility and India favors more options for reserve currencies, he said.

One-year implied volatility in the rupee, a measure of exchange-rate swings used to price options, fell 10 basis points, or 0.10 percentage point, to 10.55 percent. The rate is the lowest since March 26.

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