Winding up the clock of India-Nepal economic ties, Pg6

Key Highlights:

• On October 1, 2025, the RBI announced measures to boost India-Nepal economic ties by internationalizing the Indian Rupee (INR).
• RBI will allow Authorized Dealer (AD) banks to lend INR to non-residents in Nepal, Bhutan, and Sri Lanka for cross-border transactions.
• Special Rupee Vostro Accounts will now be allowed for investment in corporate bonds and commercial papers, in addition to government securities.
• A transparent reference rate for currencies of India’s major trading partners will be established to facilitate INR-based transactions.
• Indian firms constitute 33% of the total FDI stock in Nepal, amounting to nearly $670 million.
• India accounts for 65% of Nepal’s international trade, including $8 billion in exports from India to Nepal.

Detailed Insights:

• The INR-NPR exchange rate has been pegged at 1.6 for years, shielding the NPR from depreciation against hard currencies.
• Allowing ADs to lend INR to Nepal is expected to help Nepalese industries overcome challenges related to working capital and scalability.
• Nepal's industrial performance has struggled due to a lack of confidence from Nepalese banks in lending to businesses, creating structural economic flaws.
• India’s lending outreach aims to give traction to Nepalese businesses, facilitating trade with India by removing institutional credit obstacles.
• With the United States announcing a tariff of only 10% for Nepal, INR-financed trade with India can boost Nepal's imports for value addition.
• Nepal is India’s 17th largest export destination, with India receiving 67% of Nepal's total exports, including edible oil, coffee, tea, and jute.
• Using INR as the preferred currency for trade can shield Nepal's economy from dollar exchange rate fluctuations and ease hard currency availability issues.
• The Nepal Rastra Bank (NRB) may need to implement instrumentalities to leverage the RBI's move and protect their economic interests.

Key Concepts Involved:

• Authorized Dealer (AD) Banks: Banks authorized by the RBI to deal in foreign exchange.
• Special Rupee Vostro Account: An account held by a foreign bank with an Indian bank in Indian Rupees (INR).
• Foreign Direct Investment (FDI): An investment made by a firm or individual in one country into business interests located in another country.