The two leaders signed agreements on closer economic ties
India and Bangladesh have signed five agreements including treaties on tackling cross-border crime and combating terrorism.
The agreements were signed on the first day of Bangladesh Prime Minister Sheikh Hasina's official visit to India.
They included a pledge by Delhi to provide a $1bn credit to improve Bangladesh's infrastructure.
The announcement was made after Sheikh Hasina met her Indian counterpart, Manmohan Singh.
Officials say that much of the money provided by India will be used for improving Bangladesh's railway network and dredging the rivers shared between the two countries.
Sheikh Hasina assured the Indians that Bangladesh would not allow its soil to be used by groups "inimical to India".
Ties between the two have improved after Sheikh Hasina's Awami League-led government came to power last year.
Sheikh Hasina (R) said she wanted to rid Bangladesh of poverty
Since then Bangladesh has cracked down on Indian separatist rebels sheltering in the country and handed over several senior rebel leaders to India.
Nearly 200 fighters belonging to rebel groups in Assam and Tripura have fled the crackdown in Bangladesh and some have already surrendered.
"We are confident that this visit would serve to underline that strong India-Bangladesh relations are vital, not just for both our countries, but for the entire region and the international community," Indian Foreign Secretary Nirupama Rao said.
Sheikh Hasina met Mr Singh and ruling Congress party chief Sonia Gandhi on Monday. On Tuesday she received the Indira Gandhi Prize for Peace, Disarmament and Development.
She said that she was deeply honoured to receive the prize and thanked the Indian president, prime minister and Mrs Gandhi.
"This most prestigious prize also greatly honours my country and people," Sheikh Hasina said.
Correspondents say the two countries still have a range of contentious issues to resolve ranging from the sharing of river waters to demarcation of a maritime boundary in the Bay of Bengal.
Bangladesh and India share more than 50 rivers but Bangladesh believes it is not getting enough water, as India has built a number of dams upstream.
The dispute over the maritime border is important as it is believed that there may be vast gas and oil deposits in the Bay of Bengal.
Bangladesh's Foreign Minister Dipu Moni told the BBC that the country was prepared to go the UN if bilateral negotiations failed to solve the maritime boundary dispute.