Context

• On October 1, 2025, Reserve Bank of India (RBI) Governor Sanjay Malhotra announced a set of measures aimed at internationalising the Indian rupee (INR).
• While these initiatives have broad regional implications, they hold special promise for strengthening the economic relationship between India and Nepal.
• The new RBI policies, allowing authorised dealer (AD) banks to lend rupees to non-residents, permitting Special Rupee Vostro Accounts (SRVAs) to invest in corporate instruments, and establishing transparent reference rates for major currencies, signal a deepening of financial and trade cooperation.
• For Nepal, these developments could mean easier access to credit, stronger trade integration, and a potential transformation in its macroeconomic resilience.

The RBI’s Measures: Pathways to Integration

• The first measure allows AD banks in India to extend rupee-denominated loans to non-residents from Nepal, Bhutan, and Sri Lanka for cross-border trade.
• This reform addresses a long-standing gap in institutional credit, particularly for industries engaged in India–Nepal trade.
• The second measure expands the scope of Special Rupee Vostro Accounts to include investments in corporate bonds and commercial papers, thus enhancing cross-border capital flows.
• The third initiative, establishing a transparent reference rate for major currencies, introduces predictability and reduces exchange rate volatility, making INR-based transactions more efficient and reliable.
• Collectively, these steps not only promote the rupee’s international role but also facilitate smoother trade settlements and stronger financial cooperation between India and its neighbours, particularly Nepal.

Nepal’s Domestic Constraints and the Credit Challenge

• Despite steady remittance inflows, Nepal continues to face structural weaknesses in its economy.
• After a partial recovery from the COVID-19 pandemic, its industrial performance remained stagnant due to a lack of business confidence and restricted access to credit.
• Nepalese banks, often controlled by large industrial houses, have been conservative in lending to small and medium enterprises (SMEs).
• This has resulted in credit bottlenecks, weak supply chains, and limited employment opportunities, fuelling economic instability and political unrest.
• By allowing Indian banks to lend directly in INR, the RBI’s policy provides alternative credit channels for Nepalese enterprises.
• Access to competitively priced loans could encourage industrial expansion, improve liquidity, and boost participation in cross-border trade, thus offsetting Nepal’s domestic financial rigidity.

The Dynamics of India–Nepal Trade

• The India–Nepal economic relationship is defined by deep interdependence. India accounts for nearly 65% of Nepal’s international trade, with exports from India exceeding $8 billion and imports from Nepal around $1 billion.
• Indian firms remain major investors in Nepal, contributing 33% of total FDI worth approximately $670 million.
• Despite the asymmetry, the partnership serves as a vital economic lifeline for Nepal, offering market access, investment capital, and technological linkages.
• The exchange rate peg of 1.6 Nepalese rupees (NPR) to 1 Indian rupee has provided monetary stability and shielded Nepal from sharp currency depreciations.
• Maintaining this peg, while enabling new credit and investment avenues, reinforces macroeconomic confidence and trade-led growth.
• Thus, the RBI’s measures can deepen financial interlinkages without disturbing the existing monetary equilibrium.

Strategic and Economic Multiplier Effects

• Beyond trade, the RBI’s measures have strategic implications. Increasing the use of INR in Nepal’s transactions will reduce dependency on the U.S. dollar and mitigate exposure to global currency volatility.
• This can ease pressure on foreign exchange reserves, narrow the Current Account Deficit (CAD), and enhance financial stability.
• A robust INR–NPR financial ecosystem may also promote joint ventures, industrial clustering, and value-added processing for export-oriented growth.
• From India’s standpoint, these steps align with its ambition to make the rupee a regional trade currency, thereby strengthening India’s financial influence and economic diplomacy amid a changing global monetary landscape.

The Way Forward: Implementation and Institutional Coordination

• The success of these policies depends on institutional cooperation.
• The Nepal Rastra Bank (NRB) must interpret, adapt, and implement the RBI’s framework while safeguarding Nepal’s monetary interests.
• Developing compliance mechanisms, risk assessment protocols, and prudential norms will be essential for effective adoption.
• Collaboration on sovereign guarantees, Letters of Credit, and country risk ratings will help institutionalise bilateral trust.
• The RBI’s reputation for prudence, combined with the NRB’s reciprocation and adaptability, could lay the groundwork for a sustainable financial partnership that enhances regional monetary stability and trade competitiveness. 

Conclusion

• The RBI’s October 2025 announcements mark a turning point in India–Nepal economic relations.
• By promoting the internationalisation of the rupee in a regionally inclusive manner, these reforms offer Nepal an opportunity to overcome its credit constraints and enhance its trade competitiveness.
• At the same time, India consolidates its position as a regional financial anchor and a driver of South Asian integration.
• The ultimate success of these initiatives will depend on regulatory synchronisation, institutional readiness, and a shared economic vision.