India and Japan are exploring a new framework that would allow businesses to settle bilateral trade directly in Indian rupees and Japanese yen, reducing dependence on the US dollar for commercial transactions. The proposal, discussed during the 16th India-Japan Annual Summit in New Delhi, aims to make cross-border trade faster, cheaper, and more efficient, rather than to replace the dollar in global commerce.
Through such a framework, it will be possible for businesses in the two nations to bill and pay each other in their respective currencies. Today, most of the business between India and Japan takes place via the US dollar, which entails several currency conversions that raise costs and increase exposure to currency risk.
Through the proposal, the goal will be to reduce such costs and currency risks, with Japanese businesses able to have accounts in Indian commercial banks. Such a system will be of great advantage to smaller and medium-sized firms that tend to pay more in foreign exchange and remittance costs.
These talks are part of an ongoing strategy aimed at strengthening the financial relationship between the two countries. At the meeting with Prime Minister Narendra Modi in Tokyo in 2025, Japan announced its intention to invest $61 billion in India over the next ten years, while both countries also decided to cooperate on payment systems and transactions in national currencies.
It should be noted that officials are also working on developing the Memorandum of Cooperation between Japan’s Ministry of Finance and the Reserve Bank of India, which would help implement the proposed settlement system.
India and Japan already have a currency swap arrangement worth $75 billion between them, making it easy for monetary cooperation to proceed on this basis. The proposal further dovetails with the Special Rupee Vostro Account scheme launched by the Reserve Bank of India in 2022.
The RBI has consistently maintained that local-currency settlements are designed to complement existing payment systems rather than replace freely convertible currencies. The exchange rates under these arrangements remain market-driven.
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The proposed move takes place against the backdrop of increasing India-Japan economic cooperation in several sectors, including trade, manufacturing, infrastructure, technology, and defense. Bilateral merchandise trade was estimated at around $27.47 billion during FY2025-26, and Japanese companies have a substantial manufacturing base in India.
In addition to lowering transaction costs, the introduction of a settlement arrangement between the yen and the rupee aims to improve the reliability of the two nations’ financial conduits and to develop economic cooperation. The measure is seen as a means to improve economic collaboration and to facilitate business processes.