In a bold step toward making the Indian rupee more global, the Reserve Bank of India (RBI) has announced that licensed Indian banks (and their overseas branches) will now be allowed to lend in Indian rupees (INR) to residents, businesses, and financial institutions in Bhutan, Nepal, and Sri Lanka.
This policy change is part of India’s broader strategy to reduce dependence on the U.S. dollar and promote regional trade settlements using the rupee.
Key Details of the Move
- The authorization applies to Authorized Dealer (AD) banks in India and their overseas arms.
- These banks can lend rupee denominated loans to eligible parties in the three countries for trade and related business purposes.
- Previously, Indian banks providing cross-border credit had to do so in foreign currencies; this decision changes that by allowing direct rupee credit.
- The step comes alongside reforms expanding the use of Special Rupee Vostro Accounts (SRVA), enabling balances to be invested in corporate bonds and commercial paper (beyond just government securities).
Why This Matters
- This gives borrowers in Bhutan, Nepal, and Sri Lanka easier access to rupee liquidity, reducing the cost and complexity of converting to and from foreign currency.
- For India, it encourages rupee use in regional trade, strengthens financial ties, and enhances the rupee’s role outside domestic borders.
- It could make trade settlements smoother and more predictable for Indian exporters and importers dealing with these nations.
- The reform also signals India’s ambition to gradually internationalize its currency expanding its footprint in neighbouring economies.
Challenges & Risks
- The success depends on how much demand exists from borrowers in those countries for rupee borrowing.
- Currency volatility and rupee depreciation could deter parties from accepting rupee loans.
- Indian banks will need to manage foreign exchange risk carefully, such as ensuring they are not exposed to large adverse movements.
- Legal, regulatory, and coordination frameworks across countries must be strengthened to support enforcement, repayment, and dispute handling in cross border rupee lending.
What’s Next
- The RBI will likely roll out detailed rules under the Foreign Exchange Management Act (FEMA) to govern these cross border rupee loans.
- It may expand this regime gradually to other neighbouring or friendly countries if the pilot works well.
- Monitoring of uptake, risk management, and potential impact on the rupee’s stability will be key.
- India may also look to establish official reference exchange rates for partner currencies to support rupee based trade.
