Nepal Gains Access to Indian Rupee Loans
The Reserve Bank of India (RBI) has introduced a landmark policy that allows Indian banks and their overseas branches to provide loans in Indian Rupees (INR) to residents and financial institutions in Nepal, Bhutan, and Sri Lanka. Announced on October 1, 2025, this decision represents a significant step toward regional economic integration and the gradual internationalization of the Indian rupee. For Nepal in particular, the move holds the potential to reshape access to credit, trade settlements, and investment financing in the years ahead.
A Regional Shift in Cross-Border Lending
Under the new framework, Authorised Dealer (AD) banks in India, including major institutions like the State Bank of India, ICICI Bank, HDFC Bank, and Axis Bank, can now extend rupee-denominated loans to eligible individuals and entities in the three neighboring countries. The loans will mainly support trade-related and current account transactions, helping reduce dependence on third-country currencies such as the US dollar.
This policy aligns with the RBI’s long-term objective of promoting the rupee as a preferred currency for international trade and settlement. The central bank has been gradually liberalizing regulations under the Foreign Exchange Management Act (FEMA), and the latest announcement represents a calibrated step toward making rupee liquidity more accessible to India’s closest trading partners.
RBI Governor Sanjay Malhotra stated that the initiative reflects India’s commitment to regional financial stability. He also emphasized that the move will make credit facilities more accessible across South Asia while boosting trade efficiency and currency stability.
What it menas for Nepal?
For Nepal, India’s new rupee lending policy opens a range of possibilities. As India already accounts for over 60 percent of Nepal’s total international trade, greater access to Indian rupee credit could simplify financial transactions and reduce the cost of doing business. In fiscal year 2024/25 alone, Nepal exported goods worth about Rs 224 billion to India and imported roughly Rs 1.71 trillion. Most of these transactions already rely on the Indian rupee, but settlement processes often involve intermediaries or conversion through the US dollar. The RBI’s decision could eliminate this inefficiency. Economists in Nepal have noted that the policy can create an additional funding channel for Nepali businesses and banks. This move is seen as an opportunity to mobilize more financial resources within the country, which will also push our banking sector to become more competitive.
Nepal’s interest rates are relatively higher compared to India’s, meaning that rupee-denominated loans from Indian banks could offer cheaper financing for large projects.
Rules on Foreign Borrowing in Nepal
Nepal Rastra Bank had already allowed foreign borrowing under the Foreign Investment and Foreign Loan Management Regulations, 2021. Nepali companies, industries, and institutions are permitted to obtain loans from foreign banks and entities approved by their respective central banks. These loans can be denominated in foreign currencies, including the Indian rupee.
The regulation allows loans in INR to be issued at interest rates up to two percentage points above the Marginal Cost of Funds-based Lending Rate (MCLR) determined by the RBI. Companies can borrow up to INR 100 million from India, with repayment periods typically set at one year. However, such funds cannot be used for investments in real estate or securities. Foreign-invested industries can also borrow from abroad up to 100 percent of their paid-up capital or net assets, subject to central bank approval.
Moreover, any borrowing from foreign institutions requires NRB approval and full responsibility for foreign exchange risk. While Indian credit could be beneficial, it must be used prudently to prevent potential capital outflows as a cautionary measure.
Upgrading the Face of Rupees
The RBI’s decision is part of a broader strategy to strengthen India’s financial presence in South Asia. Beyond lending, the RBI has expanded the use of Special Rupee Vostro Accounts (SRVAs), which allow foreign banks to hold rupee balances in India. These balances can now be invested not only in Indian government securities but also in corporate bonds and commercial papers, providing more flexibility for liquidity management.
The RBI also plans to publish transparent reference exchange rates for major trading partner currencies. This will make conversions smoother and more predictable, encouraging more cross-border trade in local currencies.
By providing rupee liquidity to neighboring economies, India aims to reduce their dependence on the US dollar and establish the rupee as a credible regional settlement currency. This initiative also complements efforts by other countries seeking to diversify trade settlement mechanisms and reduce exposure to dollar volatility.
Alongside the new lending framework, the RBI kept its policy repo rate steady at 5.5 percent and introduced a revised liquidity management system. The central bank has shifted toward seven-day variable rate repo and reverse repo operations to enhance flexibility in short-term liquidity control. The policy corridor remains symmetric, with the Standing Deposit Facility as the floor and the Marginal Standing Facility as the ceiling.
The RBI also announced reforms benefiting Non-Resident Indians (NRIs), such as relaxed borrowing rules, higher investment limits, and expanded access to digital payments like Unified Payments Interface (UPI) for those using international mobile numbers.
Where does Nepal stand?
For Nepal, this development signifies a new phase of financial cooperation with India. Access to Indian credit in rupees can encourage trade growth, foster private investment, and strengthen bilateral economic ties. However, experts caution that these opportunities come with responsibilities, ensuring transparent borrowing practices, prudent foreign exchange management, and alignment with domestic monetary policies.
As India seeks to make the rupee a more globally recognized currency, Nepal stands to benefit directly from improved liquidity, lower transaction costs, and deeper financial integration with the region’s largest economy. If implemented wisely, the new lending framework could serve as a foundation for a more interconnected and resilient South Asian financial landscape.
