Internationalising the Indian Rupee and India–Nepal Economic Ties

Source: The post “Internationalising the Indian Rupee and India–Nepal Economic Ties” has been created, based on “Winding up the clock of India-Nepal economic ties” published in “The Hindu” on 27 October 2025. Internationalising the Indian Rupee and India–Nepal Economic Ties.

UPSC Syllabus: GS Paper -3-Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Context: Internationalising the Indian Rupee (INR) is a key economic objective of the Government of India to strengthen India’s position in regional and global finance. Nepal plays a vital role in this strategy because of its deep economic engagement and monetary interdependence with India.

Recent RBI Measures

1. The RBI has permitted Authorised Dealer (AD) banks to lend Indian Rupees to non-residents in Nepal, supporting trade and business activities.
2. The RBI has permitted Special Rupee Vostro Accounts to be used for investment in corporate bonds, commercial papers, and government securities within India.
3. The RBI has decided to establish a transparent reference exchange rate for the INR to support smoother INR-settled transactions with major trade partners, including Nepal.

Significance for Nepal’s Economy

1. Nepal relies on India for over 60 percent of its imports and one-third of its exports, which makes INR-based trade highly beneficial.
2. Access to INR liquidity strengthens Nepal’s businesses that depend on Indian supply chains and markets for growth.
3. INR-denominated lending allows Nepalese firms to avoid costly dollar conversions and reduces their exposure to global currency volatility.
4. Increased INR availability can help Nepal recover from sluggish growth caused by reduced remittances and weak industrial performance after COVID-19.

Broader Economic and Strategic Benefits

1. The expansion of INR usage reduces dependence on the US dollar and strengthens financial sovereignty in the region.
2. Easier access to Indian finance supports sectors like hydropower, tourism, manufacturing, and cross-border trade.
3. Formalising trade through INR reduces informal transactions and improves transparency in border commerce.
4. This initiative strengthens India’s role as a financial anchor in South Asia and reinforces long-term economic partnership with Nepal.

Challenges in Implementation

1. Economic and Domestic Constraints in Nepal
   1. Nepal’s private sector continues to struggle with low productivity, weak investor confidence, and limited access to competitive credit.
   2. Nepal’s financial sector requires stronger governance mechanisms to manage increased foreign lending responsibly.
2. Regulatory and Institutional Challenges
   1. The alignment of regulatory frameworks between the Reserve Bank of India and Nepal Rastra Bank is still evolving and requires sustained cooperation.
   2. Nepal needs stronger sovereign guarantee mechanisms and improved credit ratings for large-scale INR financing.
3. Political and Geopolitical Sensitivities
   1. Some groups in Nepal express concerns that deeper INR integration may lead to excessive economic dependence on India.
   2. Nepal’s engagement with China could complicate a more profound monetary alignment with India.
4. Operational and Market Risks
   1. Maintaining the INR-NPR exchange rate peg requires careful monetary coordination to avoid instability.
   2. Rapid expansion of cross-border credit without oversight could lead to debt vulnerabilities in Nepal.

Way Forward

• Both countries should establish a joint mechanism to oversee currency cooperation, credit facilitation, and cross-border regulatory compliance.
• Nepal should improve the ease of doing business, strengthen industrial capacity, and develop logistics infrastructure at key border points.
• India should expand INR-based trade into digital payments, energy cooperation, and institutional financing platforms.
• Continuous confidence-building measures are necessary to ensure that monetary cooperation remains equitable and mutually respectful.

Conclusion: Internationalising the Indian Rupee through deeper financial integration with Nepal has the potential to reshape regional trade and economic resilience. This partnership supports Nepal’s development needs while advancing India’s strategic goal of strengthening the global standing of the Rupee. A coordinated, transparent, and trust-based approach will ensure that both nations benefit from a stable and future-oriented economic relationship.

Question: Discuss the recent initiatives taken by the Reserve Bank of India to promote the internationalisation of the Indian Rupee and examine how these measures can reshape India–Nepal economic ties.