Currency Swap Agreement Between India and Japan

Background of the issue

  • The Agreement shall aid in bringing greater stability to foreign exchange & capital markets in India. The facility will serve as a second line of defence for the rupee after the $393.5 billion of foreign exchange reserves that the Reserve Bank of India (RBI) has at its disposal.
  • Under the arrangement, India can acquire dollars from Japan in exchange for rupees. Conversely, Japan can also seek dollars from India in exchange for yen.
  • The arrangement will be used only when required, and will help meet short-term liquidity mismatches.

Significance of the agreement

  • The currency swap agreement is an important measure in improving the confidence in the Indian market and 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.
  • The swap arrangement should aid in bringing greater stability to foreign exchange and capital markets in India.
  • 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.

Currency Swap Arrangement (CSA)

  • This is an arrangement, between two friendly countries, which have regular, substantial or increasing trade, to basically involve in trading in their own local currencies, where both pay for import and export trade, at the pre-determined rates of exchange, without bringing in third country currency like the US Dollar.
  • In such arrangements no third country currency is involved, thereby eliminating the need to worry about exchange variations.

Recent swap agreement with Japan

  • India and Japan agreed to enter into a bilateral swap arrangement of $75 billion.
  • It will bolster the country’s firepower as it battles a steep drop in the rupee’s value.
  • Further it bringing greater stability to foreign exchange & capital markets in India.
  • The facility will serve as a second line of defence for the rupee after the $393.5 billion of foreign exchange reserves that the Reserve Bank of India (RBI) has at its disposal.
  • The term of agreement can be signed between RBI and central bank of Japan.
  • The arrangement will be used only when required, and will help meet short-term liquidity mismatches.
  • Under this arrangement, two countries or parties exchange specific amounts of different currencies for a period of time.
  • second line of defence for the rupee against depreciation.
  • Apart from Japan, India has currency swap deal of $100 million with its neighbouring country, Bhutan.
  • An important derivative tool to hedge the exchange rate risks after the global financial crisis hit in 2008.
  • India also currency-swaps with Iran in an informal way while making payment for crude oil purchases


Location: Thiruvananthapuram, Kerala, India

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