Context:
• The Reserve Bank of India (RBI) has introduced measures to boost India–Nepal economic relations by promoting INR-based trade and investment.
• The initiative marks a step towards internationalization of the Indian Rupee (INR) and aims to strengthen financial linkages with Nepal, Bhutan, and Sri Lanka.
Key Highlights:
- RBI’s Policy Measures (October 1, 2025)
- RBI will now permit Authorized Dealer (AD) banks to lend Indian Rupees (INR) to non-residents in Nepal, Bhutan, and Sri Lanka for cross-border trade and investment transactions.
- Special Rupee Vostro Accounts (SRVA) will be allowed to invest not only in Government securities, but also in corporate bonds and commercial papers — broadening the investment avenues.
- RBI will establish a transparent reference rate for currencies of India’s major trading partners to facilitate smooth INR-based settlements and reduce volatility.
- India–Nepal Economic Snapshot
- India accounts for 65% of Nepal’s total international trade and supplies goods worth USD 8 billion annually.
- Indian firms contribute 33% of the total FDI stock in Nepal (~USD 670 million).
- Nepal is India’s 17th largest export destination, while India receives 67% of Nepal’s exports, including edible oil, tea, coffee, and jute.
- Economic Implications for Nepal
- The INR–NPR exchange rate remains pegged at 1.6, helping stabilize the Nepali Rupee against hard currencies like the USD.
- Allowing INR lending aims to help Nepalese industries access working capital, addressing liquidity constraints and low lending confidence among domestic banks.
- Enhanced INR financing could facilitate industrial expansion, improve cross-border value chains, and reduce dependency on USD transactions.
- With the US imposing a low tariff (10%) for Nepal, INR-financed trade may allow Nepalese firms to import Indian inputs, add value, and re-export competitively.
- Strategic Significance
- Strengthens South Asian financial integration and expands India’s role as a regional financial anchor.
- Enhances India’s economic diplomacy, promoting rupee internationalization in the neighborhood.
- Encourages the Nepal Rastra Bank (NRB) to develop frameworks to leverage this policy for domestic industrial growth.
Relevant Mains Points:
- Importance for India–Nepal Relations:
- Consolidates India’s Act East and Neighborhood First policies through economic interdependence.
- Reduces Nepal’s currency risks and dependency on dollar reserves.
- Economic & Strategic Impact:
- Promotes financial inclusion and credit access for Nepal’s MSME sector.
- Positions India as a regional financial hub in South Asia.
- Improves supply chain integration, particularly in manufacturing and agri-trade.
- Challenges:
- Risk of macro-economic dependency on India.
- Nepal must design prudent monetary safeguards to maintain policy autonomy.
- Way Forward:
- Strengthen institutional linkages between RBI and NRB for regulatory harmony.
- Promote digital payment corridors and fintech-led INR settlements.
- Ensure transparent cross-border credit monitoring mechanisms.