Indian rupee loans are set to transform credit access in Sri Lanka as the Reserve Bank of India allows Indian banks to offer rupee-denominated loans to businesses and individuals. This move strengthens trade and reduces exchange risks.
Indian rupee loans give Sri Lanka fresh credit access and stronger trade links
In a significant step to deepen regional financial integration, the Reserve Bank of India (RBI) has officially allowed Indian banks to extend loans to customers in Sri Lanka, Bhutan, and Nepal denominated in Indian rupees. This decision marks a new chapter in economic collaboration and credit accessibility across South Asia.
According to the announcement, Indian bank branches in Sri Lanka can now issue Indian rupee loans to banks, businesses, and individuals. This measure aims to ease credit flows and encourage businesses to access capital without facing volatile currency exchange risks. The Indian Embassy in Colombo welcomed the decision, emphasizing that it will support Sri Lankan businesses and enhance cross-border financial links.
The provision is expected to offer a practical advantage for Sri Lankan borrowers. Historically, businesses in Sri Lanka relied heavily on US dollar-denominated loans, which exposed them to exchange rate fluctuations. By shifting to Indian rupee loans, companies can reduce exposure to external currency shocks while fostering more stable trade with India, one of Sri Lanka’s largest import partners.
Analysts point out that while interest rates on Indian rupee loans may be higher than US dollar loans, the relative stability of the Indian rupee could offset this cost. Since 2011, after the RBI’s monetary anchor shifted from wholesale price index to retail, the rupee has experienced steady depreciation rather than volatile swings, making it a predictable currency for regional trade.
This move is especially timely for Sri Lanka, which continues to face the aftermath of its worst currency crisis. The island nation’s credit rating remains weak, driving up the cost of foreign borrowings. During previous crises, Indian banks played a critical role by confirming Sri Lanka’s letters of credit and supporting food imports from India through informal credit arrangements. This history of financial cooperation lays a strong foundation for the new lending framework.
In recent months, Sri Lankan banks have accumulated substantial US dollar reserves as the Central Bank of Sri Lanka curtailed money printing and adjusted its inflation targets. This has improved capital preservation and allowed Sri Lankan banks to finance Indian institutions. By allowing Indian rupee lending, both countries can further solidify financial resilience and encourage real trade to be conducted in the Indian currency.
The Indian rupee has a long and influential history in the region. Once silver-based, it served as the dominant currency across South Asia and the Middle East—including present-day Dubai and Qatar—under British administration. In the late 19th century, Sri Lanka (then Ceylon) also operated a currency board linked to the Indian rupee following a financial crisis in 1884.
The establishment of the Reserve Bank of India in 1935 paved the way for India’s transition to the gold standard. However, after nationalization in 1949, India faced a series of monetary challenges as economic policy shifted to centralized planning and interventionist models. These policies led to multiple currency crises and a gradual retreat of the rupee’s global influence.
Notably, the devaluations of 1949 and 1966 reshaped monetary landscapes across the region. Gulf states like Dubai and Qatar responded by setting up currency board systems that maintained monetary stability and eventually became major employers of Indian labor. These historical precedents highlight the significance of currency stability for economic growth and trade expansion.
Today, the revival of Indian rupee lending in Sri Lanka signifies more than just a financial transaction—it reflects a strategic push for regional monetary cooperation. If Indian exporters continue to accept rupees for goods and services, trade can increasingly be settled in the local currency, reducing reliance on the US dollar and insulating both economies from external shocks.
This development is expected to boost confidence among investors and businesses in Sri Lanka. Easier access to credit in a stable currency can help the private sector rebuild and expand after years of financial stress. As trade links deepen and financial flows become more predictable, both India and Sri Lanka stand to benefit from a stronger and more resilient economic partnership.