Recently, the RBI Governor Sanjay Malhotra announced three key measures to internationalise the Indian rupee (INR), aimed at boosting India–Nepal economic cooperation, facilitating cross-border trade, and deepening regional financial ties.

RBI’s Key Measures and their Significance

• Rupee Lending to Non-Residents: The RBI has permitted Authorised Dealer (AD) banks to lend INR to non-residents from Nepal, Bhutan, and Sri Lanka for cross-border transactions.
  • Significance for Nepal: This step will help Nepalese industries access working capital, address credit shortages, and improve trade liquidity, thereby easing bilateral trade with India.
• Special Rupee Vostro Accounts for Investments: RBI now allows Special Rupee Vostro Accounts—foreign bank accounts with Indian banks—to invest in corporate bonds and commercial papers, in addition to existing permissions for central government securities.
  • Significance for Regional Finance: This reform broadens investment options for foreign banks, boosts INR-based financial assets, and strengthens India’s role as a regional financial hub.
• Transparent Reference Rate Mechanism: RBI will create a transparent reference rate for currencies of major trading partners.
  • Significance for Cross-Border Trade: It will facilitate INR-based settlements, improve exchange rate predictability, and make rupee transactions more attractive and stable.

Background of the India–Nepal Exchange Peg and Trade Relations

• Exchange Rate Stability: The INR–NPR exchange rate has remained pegged at 1 INR = 1.6 NPR, ensuring currency stability for Nepal.
• Trade Volume: India accounts for 65% of Nepal’s total international trade, exporting goods worth $8 billion to Nepal and importing about $1 billion.
• Investment Ties: India is the largest foreign investor in Nepal, holding 33% of total FDI stock, valued at approximately $670 million.
• Export Partnership: India is Nepal’s top export destination, purchasing 67% of Nepal’s exports, including edible oils, tea, coffee, and jute.

Potential Impact on India–Nepal Economic Relations

• Boost to Bilateral Trade and Credit Access: The RBI’s move allowing Indian banks to lend INR to non-residents from Nepal will help Nepalese businesses overcome credit shortages, enhance working capital availability, and stimulate bilateral trade and industrial growth.
• Promotion of Rupee-Based Transactions: Encouraging INR-denominated trade will reduce Nepal’s dependence on the US dollar, provide exchange rate stability, and improve overall financial predictability for businesses operating across borders.
• Deepening Financial and Investment Linkages: Permitting investments through Special Rupee Vostro Accounts in corporate bonds and commercial papers will strengthen cross-border financial integration, fostering greater cooperation between the RBI and the Nepal Rastra Bank (NRB).
• Expansion of Trade Opportunities: With the 10% US tariff concession on Nepalese exports, INR-financed imports from India can support value-added production, export diversification, and joint ventures, contributing to industrial growth and employment.
• Macroeconomic and Multiplier Effects: The measures will ease foreign exchange pressure, narrow Nepal’s Current Account Deficit (CAD), and enhance regional financial stability through consistent rupee settlements. 
  • They also open avenues for institutional dialogue between the RBI and NRB on credit risk management, sovereign guarantees, and financial cooperation frameworks.
• Strategic and Regional Importance: The policy aligns with India’s Neighbourhood First approach, positioning the Indian rupee as a regional reserve and settlement currency.
  • It reinforces monetary and trade linkages within South Asia, fostering mutual economic resilience and reducing vulnerability to global currency volatility.

Economic Challenges in Nepal

• Post-Pandemic Recovery: Nepal’s recovery after the COVID-19 lockdown was brief and largely driven by remittances, which soon declined.
• Credit Shortages: Domestic banks in Nepal remain reluctant to lend to small and medium businesses, creating a severe working capital crisis.
• Supply Chain Disruptions: Weak credit flow and low domestic demand have led to disruptions in supply chains and reduced industrial output.
• Rising Unemployment: These factors have resulted in high unemployment and economic uncertainty, influencing Nepal’s recent political shifts.

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Way Forward

• Strengthen Coordination Mechanisms: RBI and NRB should establish a Joint Monetary Coordination Forum to streamline implementation and monitoring.
• Expand INR Trade Mechanisms: Extend INR-based facilities to other South Asian partners, promoting regional currency cooperation.
• Enhance Banking Presence: Encourage Indian banks to expand operations in Nepal, improving access to credit and remittance services.
• Review Exchange Rate Peg: Conduct periodic reviews of the INR–NPR peg to ensure continued stability and mutual benefit.

Conclusion

RBI’s rupee internationalisation measures mark a milestone in India–Nepal financial integration, promoting INR-based trade, credit access, and currency stability, while fostering regional cooperation and long-term economic resilience.

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