Introduction

On October 1, 2025, RBI Governor Shaktikanta Das unveiled steps to deepen INR–NPR linkages. This move signals India’s intent to make the rupee a regional trade and investment currency. These include:

1. Allowing Authorised Dealer (AD) banks to lend INR to non-residents from Nepal, Bhutan, and Sri Lanka.
2. Permitting Special Rupee Vostro Accounts for foreign banks to hold Indian bonds and corporate papers.
3. Establishing a transparent reference rate for major trading partner currencies to facilitate INR-based transactions.

This marks a strategic departure from decades of tightly controlled cross border monetary flows. It aligns with India’s ambition to make the rupee a “South Asian Settlement Currency” and deepen economic resilience across borders.

The Significance of RBI’s Move:

1. Internationalisation of INR: Strengthens INR’s role as a regional settlement currency, reducing dependence on the dollar.
2. Cross border integration: Enables Nepal, Bhutan, and Sri Lanka to engage in INR based transactions, supporting regional financial stability.
3. Investor confidence: Allows Nepalese investors to diversify holdings in Indian bonds and securities.
4. Trade facilitation: Establishes a transparent mechanism for pricing and settlement of bilateral trade.

The Hurdles in Nepal

1. COVID-19 Economic Fallout: Nepal’s economy struggled with post-pandemic recovery as industrial performance remained weak.
2. Credit Crunch: Low confidence among banks led to restricted lending, making it difficult for small businesses to sustain.
3. Supply Chain Strain: Domestic credit shortages impacted internal supply chains and imports, amplifying inflationary pressures.
4. Structural Weakness: Chronic trade deficit, narrow industrial base, and dependency on remittances limit growth resilience.
5. Political Uncertainty: Frequent political instability has deepened investor hesitation.

How India’s Lending Outreach Could Change the Game

1. Rupee Lending Window: RBI’s INR credit facility allows Nepalese firms to access Indian capital markets, easing liquidity pressure.
2. Reduced Dollar Dependence: Using INR for trade and lending could insulate both economies from dollar exchange fluctuations.
3. Enhanced Trust: Transparent reference rates can reduce cross border settlement disputes and improve institutional confidence.
4. Joint Ventures: Encourages cross border investments and participation in sectors like hydropower, manufacturing, and tourism.

The Trade Equation Between India and Nepal

1. High Interdependence: India remains Nepal’s largest trading partner, accounting for 65% of its total trade.
2. FDI Flows: India is Nepal’s largest FDI source, contributing 33% of total foreign investment, worth nearly $670 million.
3. Export–Import Composition: India imports billion dollar worth of goods from Nepal, including coffee, tea, and herbal products, while exporting essential commodities and petroleum.
4. Monetary Peg: The INR–NPR peg (₹1 = NPR 1.6) has stabilised bilateral transactions for decades, but rising inflation and dollar volatility demand recalibration.

Challenges to Implementation

1. Institutional Compliance: Nepal Rastra Bank (NRB) must reform regulatory processes to align with RBI’s updated norms.
2. Risk of Overdependence: Over reliance on INR could expose Nepal’s economy to India’s monetary shocks.
3. Operational Barriers: Currency convertibility limits and legal harmonisation may delay smooth execution.
4. Political Sensitivity: Perception of “rupee dominance” may spark internal opposition in Nepal’s political circles.

Possible Multiplier Effects

1. Stronger INR: If successfully implemented, the move can strengthen INR internationally while stabilising Nepal’s currency.
2. Reduced Dollar Outflows: Bilateral INR use saves foreign exchange reserves, improving both nations’ current account positions.
3. Boost to Trade Financing: Easier credit availability to Nepalese traders can expand import capacity for Indian goods.
4. Regional Model: Success may inspire replication with Bhutan, Sri Lanka, and Bangladesh under the Neighbourhood First Policy.

Conclusion

The RBI’s initiative represents more than a banking reform, it is a strategic assertion of economic diplomacy in South Asia. By aligning monetary instruments with foreign policy, India aims to create a shared financial ecosystem that stabilises its neighbourhood while propelling the rupee towards international recognition. For Nepal, this marks a chance to integrate deeper into India’s growth story and move towards sustainable, confidence driven development.

PYQ Relevance

[UPSC 2018] How would the recent phenomena of protectionism and currency manipulations in world trade affect macroeconomic stability of India?

Linkage: This question relates to currency stability and external sector management. The RBI–Nepal rupee measures reflect India’s proactive approach to enhance rupee resilience and reduce dollar dependence, aligning with UPSC’s recurring focus on monetary stability and economic diplomacy.

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