Enhancing India-Nepal Economic Ties
On October 1, 2025, the Reserve Bank of India (RBI) announced key measures aimed at strengthening the economic relationship between India and Nepal, particularly through the internationalisation of the Indian rupee (INR).
Key Measures Announced by the RBI
- Lending in INR: Authorized dealer banks are now permitted to lend INR to non-residents in Nepal, Bhutan, and Sri Lanka for cross-border transactions, facilitating easier access to capital.
- Special Rupee Vostro Accounts: These accounts will allow foreign banks to invest in Indian corporate bonds and commercial papers in INR, in addition to central government securities.
- Transparent Reference Rate: Establishing a reference rate for currencies of India’s trading partners to aid INR-based transactions.
Current Economic Dynamics
The INR to Nepalese rupee (NPR) exchange rate has been pegged at 1.6 for many years, protecting the NPR from depreciation against hard currencies. This stable exchange rate supports demands for institutional credit without risking economic stability.
Impacts on Nepalese Economy
- India's lending outreach is expected to boost Nepalese businesses by easing institutional credit barriers, crucial for overcoming challenges in working capital and trade scalability.
- The lack of lending confidence by Nepalese banks, exacerbated by economic uncertainties, has hindered business growth and contributed to high unemployment.
- With the U.S. lowering tariffs to 10% for Nepal, INR-financed trade could enhance Nepal's value addition capabilities and foster joint ventures with India.
Economic Interdependence
- India is a significant investor in Nepal, accounting for 33% of FDI, valued at approximately $670 million.
- Nepal ranks as India's 17th largest export destination, with bilateral trade heavily tilted towards India, comprising 65% of Nepal's international trade.
- India is the principal export destination for Nepal, taking 67% of its exports, including products like edible oil, coffee, tea, and jute.
Strategic Importance of INR
Adopting INR as a preferred trade currency with India could decrease Nepal's reliance on the dollar, mitigate exchange rate fluctuations, and ease hard currency availability issues. This shift can potentially stabilize the Current Account Deficit (CAD), offering broader economic benefits.
Future Consultations and Collaborations
- Openings in currency management should lead to broader discussions on sovereign guarantees, Standby Letters of Credit, and risk ratings.
- Decoding and implementing RBI's measures will require Nepal's cooperation, ensuring compliance with RBI guidelines for cross-border borrowing.
Overall, the RBI's initiatives are poised to rejuvenate India-Nepal economic relations, creating a more equitable playing field for both countries.