As already said, the main objective of currency swaps is to avoid turbulence and other risks in the foreign exchange market and the exchange rate. Central banks and governments conduct sw swps of currencies with foreign counterparties to ensure an appropriate foreign currency in times of currency shortage. Both work for the same purpose and through similar mechanisms. This agreement will allow India and Japan to act in their own currencies and reduce pressure on India`s current account. India-Japan Agreement: At a time when the rupee is experiencing its biggest decline in recent years, India and Japan have signed the world`s largest bilateral currency swap agreement, a measure aimed at building confidence in the foreign exchange and capital markets of the former. The bilateral agreement comes against the backdrop of rising interest rates in the United States, which has led to a strengthening of the US dollar against other currencies and capital flight from emerging countries. Often, the popular form of currency swewing is between two central banks. In this case, the main purpose of currency exchange by a central bank such as the RBI is to obtain the foreign currency from the issuing foreign central bank on the conditions set (such as the exchange rate and currency volume) for the swap. In addition to supporting the domestic market for money and foreign exchange, another main objective of currency exchange is to maintain the value of foreign exchange reserves with the central bank.
The bilateral foreign exchange agreement will also increase India`s foreign exchange reserves (FOREX). India`s FOREX reserves have fallen since peaking at US$426.08 billion in April 2018. The deal is expected to help make India`s foreign exchange and capital markets more stable, the statement added. “India and Japan have agreed to conclude a $75 billion bilateral exchange agreement. This swap agreement would be 50% higher than our last swap agreement. This bilateral exchange reflects the depth of our deeper economic relationship,” Finance Minister Arun Jaitley tweeted.