The Reserve Bank of India (RBI) has unveiled a series of measures to promote the internationalization of the Indian rupee (INR), including allowing authorized dealer (AD) banks to extend rupee-denominated loans to non-residents in Bhutan, Nepal, and Sri Lanka for bilateral trade transactions. Announced by RBI Governor Sanjay Malhotra during the October 1, 2025, Monetary Policy Committee (MPC) meeting, this initiative marks a significant liberalization under the Foreign Exchange Management Act (FEMA). It aims to deepen INR-based settlements, reduce reliance on the US dollar, and shield regional economies from exchange rate volatility, especially amid US tariff threats.
For businesses in South Asia, economists tracking INR’s global role, and investors in emerging markets, these steps could facilitate $5-10 billion in annual trade flows while strengthening economic ties. With India’s current account deficit narrowing to 0.2% of GDP in Q1 FY26, the RBI’s proactive stance supports rupee stability. Let’s break down the new framework, its scope, and the broader economic ripple effects.
The New Framework: Rupee Lending and SRVA Expansion
The RBI’s announcements focus on three pillars to enhance INR’s cross-border utility: rupee lending to neighbors, transparent reference rates for trading partners, and expanded use of Special Rupee Vostro Accounts (SRVAs). These build on existing bilateral agreements, like the INR-Sri Lankan rupee pact, to foster local currency trade.
Key measures:
| Measure | Details | Expected Impact |
|---|---|---|
| Rupee Lending to Neighbors | AD banks can lend INR to non-residents in Bhutan, Nepal, and Sri Lanka for trade-related purposes. | Enables $5-10B in annual bilateral trade; reduces forex costs by 20-30% for SMEs. |
| Reference Rates for Trading Partners | RBI to publish transparent rates for currencies of major partners to facilitate INR settlements. | Simplifies invoicing; boosts INR use in 20% of India’s $800B trade. |
| SRVA Enhancements | SRVA balances eligible for investments in corporate bonds and commercial papers. | Increases liquidity for foreign banks; promotes deeper regional integration. |
Governor Malhotra emphasized: “We have been making steady progress in the use of the Indian Rupee for international trade. These steps are measured but consequential, reducing dependence on the US dollar and mitigating exchange rate risks.”
This extends to easing NRI borrowing norms, raising lending limits against shares from ₹20 lakh to ₹1 crore, and expanding IPO financing from ₹10 lakh to ₹25 lakh per person.
Why Now? Regional Trade Boost Amid Global Headwinds
India’s trade with Bhutan ($1.5B), Nepal ($8.5B), and Sri Lanka ($5B) totaled $15B in FY25, but dollar dominance exposes them to volatility—exacerbated by US tariffs (up to 50% on Indian goods) and rupee depreciation (30% since 2014). By enabling INR lending, the RBI addresses this, aligning with the 2022 rupee internationalization framework.
Strategic drivers:
- Dollar Reduction: INR settlements now cover 20% of eligible trade; lending could add 10-15%.
- Neighborly Ties: Builds on SRVAs with Sri Lanka/Bhutan; Nepal joins for seamless Himalayan trade.
- Economic Resilience: Shields against $20B FPI outflows in 2025; supports CAD at 0.2% of GDP.
The MPC’s neutral stance—repo rate at 5.5%—complements this, projecting 6.7% FY26 GDP growth.
Implications: $5-10B Trade Unlock and Rupee’s Global Ascent
For businesses, rupee loans lower costs for imports (e.g., Nepali hydropower to India) and exports (Sri Lankan tea), potentially saving 20-30% on forex. Economists see INR as a regional anchor, rivaling yuan in SAARC trade. Investors benefit from stable remittances ($100B annually) and reduced volatility.
Broader effects:
- Trade Surge: Could add $5-10B in bilateral flows by FY27.
- Policy Ripple: Extends to NRI perks, boosting $100B inflows.
- Challenges: Implementation via AD banks; monitoring for misuse.
As RBI’s December MPC approaches, these measures could solidify INR’s role in 20% of India’s trade.
Conclusion: RBI’s Rupee Lending Leap – A Regional Game-Changer
The RBI’s permission for rupee loans in Bhutan, Nepal, and Sri Lanka is a strategic masterstroke for INR internationalization, unlocking $5-10B in trade while buffering against dollar risks. Amid 6.7% FY26 growth forecasts, it fortifies South Asia’s economic ties. Watch for SRVA expansions to drive deeper integration. ET
