Japan is poised to unveil a currency-swap line with India in itssecond international financial agreement with top Asian powers thisweek.

Finance Minister Jun Azumi told reporters today in Tokyo thatJapan is negotiating an agreement with India, the third-largesteconomy in Asia behind China and Japan. The deal is likely to beunveiled during a trip by Prime Minister Yoshihiko Noda to Indiathat starts today, with the amount of the swap line about $10billion, a Japanese government official said on condition ofanonymity.

Japan agreed with China two days ago to promote direct tradingof the yen and yuan without using dollars and to start purchases ofChinese bonds for its foreign-exchange reserves. The deal withIndia would expand the ability to respond to financial shocks asPrime Minister Manmohan Singh's administration contends with aslump in the rupee that risks stoking inflation.

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

The rupee has plunged about 15 percent against the dollar thisyear, the worst performance in Asia, after foreign investors soldshares worth $561 million as growth slows and Europe's protractedsovereign-debt crisis roiled global financial markets. A weakeningcurrency adds to the cost of imported goods in a nation that hasthe fastest inflation among so-called BRIC nations, with thebenchmark wholesale-price index rising more than 9 percent in eachof the past 12 months.

While India's foreign-exchange reserves have risen $4.8 billionin the past year to $302 billion, the country's holdings aresmaller than those of China, Japan, Taiwan, South Korea and HongKong.

India and Japan have previously supported each other withsimilar arrangements. In 2007, the two nations agreed to supporteach other in the event of a run on their currencies in the firstsuch foreign-exchange accord for the South Asian nation. Under theplan, Japan would lend dollars and other currencies should Indiafind its foreign-exchange reserves insufficient to stem a fall inthe rupee.

Japan has also deployed some of its reserves, the world's secondbiggest behind China's, to aid Japanese companies in makingoverseas acquisitions.

Direct Trading

Earlier this week, the Japanese government said Asia's twolargest economies will promote direct trading of the yen and yuanwithout using dollars and will encourage the development of amarket for companies involved in the exchanges.

Japan will also apply to buy Chinese bonds next year, allowingthe investment of renminbi that leaves China during thetransactions, the Japanese government said in a statement after ameeting between Prime Minister Yoshihiko Noda and Chinese PremierWen Jiabao in Beijing Dec. 25. Encouraging direct yen- yuansettlement should reduce currency risks and trading costs, the twogovernments said.

China is Japan's biggest trading partner with 26.5 trillion yen($340 billion) in two-way transactions last year, from 9.2 trillionyen a decade earlier. The pacts between the world's second- andthird-largest economies mirror attempts by fund managers todiversify as the two-year-old European debt crisis keeps globalfinancial markets volatile.

Bloomberg News

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.