The Hindu Editorial Analysis
27 October 2025
Winding Up the Clock of India–Nepal Economic Ties
(Source – The Hindu, International Edition – Page No. – 8)
Topic : GS Paper II: India and Its Neighbourhood Relations | GS Paper III: Indian Economy
Context
On October 1, 2025, the Reserve Bank of India (RBI) introduced new measures to internationalize the Indian Rupee (INR), with significant implications for India–Nepal trade and financial relations.
The move—allowing cross-border INR transactions, Special Rupee Vostro Accounts, and a transparent reference rate system—could revitalize India–Nepal economic ties, deepen trade integration, and enhance regional financial stability.
The editorial argues that these steps must be strategically leveraged by both nations to overcome existing credit barriers, trade imbalances, and institutional rigidities in Nepal’s economy.
1. The RBI’s New Framework: A Currency Diplomacy Milestone
a) The Three Measures Announced
- Authorised Dealer (AD) Banks:
Indian banks can now lend INR to non-residents from Nepal, Bhutan, and Sri Lanka for cross-border trade. - Special Rupee Vostro Accounts:
Foreign banks can hold INR deposits with Indian banks to invest in corporate bonds and commercial papers—creating new investment opportunities. - Transparent Reference Rate:
A mechanism for stable currency benchmarking with India’s key regional trade partners, facilitating INR-based transactions.
b) Purpose and Impact
These measures collectively:
- Reduce dependency on the U.S. dollar in bilateral trade.
- Promote financial inclusion and ease of business for Nepalese enterprises.
- Strengthen the rupee–NPR exchange corridor pegged at 1.6 (a stability anchor for decades).
2. Nepal’s Credit Challenges and Structural Hurdles
a) Post-COVID Economic Strain
- Nepal’s economy contracted severely due to lockdowns, tourism collapse, and a debt-fueled consumption model.
- Banking confidence eroded, with Nepalese banks (often controlled by large industrial houses) reluctant to lend to SMEs and rural enterprises.
b) Credit Constraints
- The tight lending ecosystem restricted access to working capital.
- Even large firms faced supply chain disruptions and cash flow shortages.
- This led to high unemployment and under-utilization of productive capacities.
The RBI’s new policy could infuse liquidity through cross-border INR credit and encourage Indian banks to collaborate with Nepalese counterparts for joint lending.
3. Trade Integration and Investment Synergies
a) Current Status of Bilateral Trade
- India is Nepal’s largest trading partner, accounting for 65% of Nepal’s total trade.
- India’s exports to Nepal ≈ $8 billion, while imports from Nepal ≈ $1 billion (2024 data).
- Indian firms also contribute 33% of total FDI in Nepal, mainly in energy, telecom, and manufacturing sectors.
b) Potential Gains from INR Internationalization
- Enables INR-based settlement, lowering transaction costs and volatility.
- Shields Nepal’s economy from dollar exchange shocks and current account imbalances.
- Encourages value-added production in Nepal for exports to India using INR-based financing.
The shift could accelerate regional supply chain integration, linking Indian industries with Nepalese ancillaries.
4. Nepal’s Domestic Policy Imperatives
a) Strengthening Financial Governance
Nepal must:
- Empower the Nepal Rastra Bank (NRB) to operationalize INR lending prudently.
- Enhance cross-border compliance and due diligence mechanisms to prevent misuse of credit.
- Build confidence in local banking through institutional reforms and credit guarantees.
b) Boosting Investment Climate
- Rationalize interest rates and strengthen SME lending.
- Ensure policy predictability to attract Indian and global investors.
- Facilitate joint ventures and public–private partnerships (especially in hydropower and manufacturing).
5. Possible Multiplier Effects
a) For Nepal
- Reduced dollar dependency will make the economy more resilient to forex volatility.
- Enhanced liquidity could ease balance-of-payments pressure and stabilize the Current Account Deficit (CAD).
- Promote employment and entrepreneurship through access to cheaper INR credit.
b) For India
- Expands the regional footprint of the rupee, advancing New Delhi’s goal of “rupee internationalization”.
- Deepens India’s economic diplomacy and strengthens its role as a regional financial anchor in South Asia.
It also reinforces India’s “Neighbourhood First” and “Act East” policies through sustainable economic interdependence.
6. Challenges Ahead
- Regulatory Coordination: RBI and NRB must synchronize frameworks on credit, taxation, and currency settlement.
- Risk of Overexposure: Excessive INR lending could create vulnerabilities if Nepal’s fiscal governance falters.
- Political Sensitivities: Domestic actors in Nepal may perceive deep rupee integration as an erosion of monetary sovereignty.
- Need for Institutional Dialogue: Regular bilateral consultations should address technical issues such as sovereign guarantees, project funding, and credit ratings.
7. The Way Forward
a) Short-Term
- Establish a Joint Currency and Trade Council between RBI and NRB.
- Pilot cross-border INR settlements in energy and manufacturing sectors.
- Develop a digital payment interface linking UPI with Nepalese systems (building on the 2023 launch).
b) Long-Term
- Broaden INR trade beyond goods — into services, remittances, and tourism.
- Encourage Nepal’s participation in India’s Unified Payment Interface (UPI) expansion.
- Institutionalize a South Asian Rupee Zone model to promote regional integration.
Conclusion
The RBI’s moves mark a transformative phase in India–Nepal financial diplomacy, aligning monetary policy with regional development.
If implemented with prudence and inclusivity, these reforms can turn South Asia’s open borders into shared economic corridors of resilience.
“When the rupee rises in Kathmandu, it strengthens not just a currency, but a neighbourhood built on trust, trade, and timeless ties.”