In a move aimed at boosting cross-border trade and promoting the Indian Rupee, the Reserve Bank of India (RBI) has proposed allowing domestic banks to lend in Rupees to non-residents in neighboring countries like Nepal, Bhutan, and Sri Lanka. This proposal, sent to the finance ministry last month, seeks to enhance the use and acceptability of the local currency in trade transactions.

The RBI's initiative involves several key measures to facilitate Rupee lending and promote its internationalization:

• Permitting Rupee Lending: Authorised dealer (AD) banks would be allowed to extend loans in Indian Rupees to non-residents from Bhutan, Nepal, and Sri Lanka for cross-border trade transactions.
• Establishing Reference Rates: The RBI plans to establish transparent reference rates for the currencies of India's major trading partners to facilitate INR-based transactions.
• Wider Use of SRVA Balances: Special Rupee Vostro Account (SRVA) balances would be eligible for investment in corporate bonds and commercial papers.

RBI Governor Sanjay Malhotra stated that these measures are part of ongoing efforts to promote the use of the Indian Rupee in international trade. The central bank has been taking steps to internationalize the rupee, which involves making it widely accepted and used for global trade, finance, and investment.

This proposal could have several positive implications:

• Increased Cross-Border Trade: By facilitating trade settlements in Rupees, the initiative could boost trade volumes between India and its neighbors.
• Reduced Forex Risk: Rupee-denominated loans would reduce exposure to foreign exchange volatility for businesses in these countries.
• Promotion of Indian Rupee: The move could promote the use and acceptance of the Indian Rupee in the region, aligning with the RBI's goal of internationalizing the currency.
• Support for Strategic Projects: Easier access to Rupee-denominated loans could support strategic projects in these countries.

The RBI has already taken several steps to encourage the use of the Rupee in global trade and investment, including permitting the opening of Rupee accounts for non-residents outside India. The central bank had also sought the government's approval to remove the cap on foreign banks with vostro accounts buying short-term sovereign debt to boost Rupee-denominated investment and trade. India's experience with local currency pacts with the United Arab Emirates, Indonesia, and the Maldives, as well as Special Rupee Vostro Accounts used for trade with Sri Lanka and Bangladesh, has highlighted the need to deepen the availability of Rupee liquidity. If the current proposal proves successful, Rupee-denominated lending could be extended to cross-border transactions globally.

The recent monetary policy review saw the RBI keep the repo rate unchanged at 5.5%. The central bank has cut the repo rate by 1% this year, bringing down EMIs for the common man. The MPC decided to wait for the impact of previous policy actions and greater clarity to emerge before making further changes. The RBI also raised the FY26 GDP growth estimates to 6.8% from 6.5% and reduced the FY26 CPI inflation forecast to 2.6% from 3.1%.