Pact aimed at bringing greater stability to forex and Indian capital markets

India and Japan signed a currency swap agreement worth $75 billion during Prime Minister Narendra Modi’s visit to Japan, the government announced on Monday.

“The Prime Ministers of India and Japan, building on great friendship between the two countries and to further strengthen and widen the depth and diversity of economic cooperation, agreed during Prime Minister Modi’s visit to Japan, to conclude a Bilateral Currency Swap Agreement for an amount of $75 billion,” the Indian government said in a statement. A currency swap typically involves the exchange of interest and sometimes of principal in one currency for the same in another currency. Interest payments are exchanged at fixed dates through the life of the contract. It is considered to be a foreign exchange transaction and is not required by law to be shown on a company's balance sheet.

“This swap arrangement particularly reflects the depth of mutual trust and understanding, personal relationship and warmth between the two leaders built over many years,” the statement added.

The currency swap agreement, the government said, was an important measure in improving the confidence in the Indian market and that it would not only enable the agreed amount of capital being available to India, but it will also bring down the cost of capital for Indian entities while accessing the foreign capital market.

‘More stability’

“The swap arrangement should aid in bringing greater stability to foreign exchange and capital markets in India,” the government said. With this arrangement in place, prospects of India would further improve in tapping foreign capital for country’s developmental needs. This facility will enable the agreed amount of foreign capital being available to India for use as and when the need arises.