Right after returning from the three-day trip to China, Prime Minister Shinzo Abe welcomed the Indian leader Narendra Modi to his vacation home at the foot of Mount Fuji.
They agreed on resuming a currency swap accord to the tune of $75 billion and more than ¥300 billion in yen loans to finance India’s infrastructure projects including a high-speed railway using Japan’s Shinkansen system.
The key for Japan-India relations going forward will be whether the two countries can elevate their ties to new stages on the basis of their latest agreements, instead of as a counterweight to China’s rise. Abe hailed Japan-India ties as having “the largest potential for development for any bilateral relationship anywhere in the world.”
Whether the two countries can realize that potential will be tested from now.
When there is an agreement between two countries, there is an exchange of money as well. These agreements or contracts can range from 5-10 years depending on the type of the project. Now, during this time, the exchange rates between the two countries may vary. So, it is a possibility that one country will be making huge profits and another may incur huge losses due to the rate of exchange. To avoid this, countries make a 'currency swap accord' and fix a rate at which money will be paid.
For example, if a swap involves exchanging €10 million versus $12.5 million, that creates an implied EUR/USD exchange rate of 1.25. The purpose of a currency swap is to hedge exposure to exchange rate risk.