How INR Lending Can Strengthen Nepal’s Trade with India?

Context

In October 2025, the Reserve Bank of India (RBI) Governor Sanjay Malhotra announced a set of policy measures aimed at furthering the internationalisation of the Indian Rupee (INR). These announcements hold significant implications for India’s economic engagement with Nepal, a close neighbour with deep financial and trade linkages.

Recent RBI Measures

The RBI unveiled three key initiatives with potential to boost India-Nepal economic cooperation:

1. Lending in INR to Non-Residents:
   1. Authorised Dealer (AD) banks in India can now lend Indian rupees to non-residents from Nepal, Bhutan, and Sri Lanka for cross-border trade and investment.
   2. This step could provide easier access to working capital for Nepalese industries engaged in trade with India.
2. Expansion of Special Rupee Vostro Accounts: Foreign banks from these countries can now use INR Vostro Accounts with Indian banks not just for investment in government securities, but also in corporate bonds and commercial papers, widening avenues for private-sector investment.
3. Transparent INR Reference Rate: The RBI will establish a transparent reference rate for currencies of India’s key trading partners. This will stabilize exchange rates and facilitate greater rupee-based trade settlements.

Economic Context: The INR-NPR Peg

1. India and Nepal maintain a long-standing exchange rate peg of 1 INR = 1.6 Nepalese Rupees (NPR).
2. This peg has served Nepal well, helping its currency remain stable against global volatility and protecting purchasing power.
3. While some economists argue for more flexibility or institutional lending reforms, the peg continues to anchor monetary stability in Nepal’s financial system.

Significance for Nepal’s Economy

1. The RBI’s move allowing INR-denominated lending can greatly assist Nepalese industries struggling with credit shortages and liquidity constraints.
2. Many businesses in Nepal face difficulties accessing loans from domestic banks due to stringent lending norms and dominance of large industrial houses in the financial sector.
3. This RBI initiative offers an alternative source of credit and may enhance industrial competitiveness and trade capacity with India.

Challenges in Nepal’s Domestic Economy

After a brief post-COVID recovery driven by high remittances, Nepal’s economy has faced several hurdles:

1. Weak industrial performance and low domestic demand.
2. Lack of confidence among Nepalese banks to lend to small and medium enterprises (SMEs).
3. High unemployment and supply chain disruptions.
4. Limited working capital and difficulty scaling up domestic industries.

These structural issues have deepened economic vulnerability and influenced political instability in the country.

Trade and Investment Links

1. India remains Nepal’s largest trading partner and investor, accounting for 65% of Nepal’s total trade and 33% of its FDI stock (worth nearly $670 million).
2. India exports around $8 billion worth of goods to Nepal annually, while Nepal’s exports to India stand just below $1 billion.
3. Major exports from Nepal to India include edible oils, tea, coffee, and jute.

This trade interdependence highlights how any policy easing financial flows in INR can have a multiplier effect on Nepal’s trade balance and investment growth.

Possible Multiplier Effects

The RBI’s measures can generate positive spillovers in several ways:

1. Encourage rupee-based trade, reducing reliance on the US dollar.
2. Shield Nepal from exchange rate fluctuations and foreign currency shortages.
3. Ease current account deficit (CAD) pressures and improve forex stability.
4. Enable joint ventures and ancillary industries between Indian and Nepalese firms.
5. Foster long-term monetary and investment cooperation between the RBI and Nepal Rastra Bank (NRB).

If implemented effectively, these measures could strengthen Nepal’s financial resilience and deepen South Asian economic integration.

Way Forward

1. The Nepal Rastra Bank (NRB) must decode and align its regulations to leverage RBI’s reforms
2. Establish mechanisms for prudential lending, risk management, and currency oversight.
3. Encourage joint consultations on sovereign guarantees, Letters of Credit (LCs), and country risk ratings.
4. Promote digital and cross-border fintech platforms to enhance financial inclusion.
5. Focus on regional economic cooperation that strengthens INR as a settlement currency for South Asia.

Conclusion

The RBI’s recent steps mark a strategic deepening of India-Nepal economic ties. By enabling rupee-based financing and expanding trade settlements, both nations can move toward a more integrated and resilient financial ecosystem. For Nepal, it opens avenues for industrial revival and currency stability, while for India, it furthers the goal of regional financial leadership and rupee internationalisation. Together, these steps could reset the economic clock of India-Nepal relations toward a more balanced and mutually beneficial future.