How India's $75 Bn Currency Swap Deal With Japan Affects Rupee's Volatility

India and Japan on Monday concluded a $75 billion bilateral currency swap agreement. Reports say that the move will help bring greater stability in foreign exchange and capital markets in India, apart from the agreement further strengthening the depth and diversity of economic cooperation between the two countries.

Prime Minister Narendra Modi, who was on a 2-day visit to Japan, held delegation-level talks with his Japanese counterpart Shinzo Abe in which the two leaders discussed a range of bilateral, regional and global issues including the situation in the Indo-Pacific region.

"With a view to enhancing financial and economic cooperation, governments of Japan and India welcomed the agreement to conclude a Bilateral Swap Arrangement (BSA) of $75 billion," said India-Japan Vision Statement issued after the summit-level meeting between the two leaders.

The swap agreement, a Finance Ministry's release said, should "aid in bringing greater stability to foreign exchange and capital markets in India...This facility will enable the agreed amount of foreign capital being available to India for use as and when need arises".

What it means is that the currency swap agreement will allow India to pay for any loans that it borrows from Japan in Indian rupees, rather than borrowing a third-party acceptable currency like the US dollar. It will also allow the country to make any interest or principal payments in domestic currency. This, in turn, will increase the demand for the national currency in the forex market, making it more valuable, and stabilizing the rupee-to-dollar ratio.

As for companies, the increased confidence in the rupee will make borrowing capital from foreign markets cheaper.