New proposal targets South Asia as first step in broader internationalisation strategy
In a significant move to bolster the global use of the Indian rupee, the Reserve Bank of India (RBI) has sought government approval to allow domestic banks and their foreign branches to lend in rupees to overseas borrowers, sources familiar with the matter said.
The central bank submitted the proposal to the Ministry of Finance last month, suggesting the rollout begin with India’s neighbouring countries — Bangladesh, Bhutan, Nepal, and Sri Lanka — which collectively accounted for nearly $25 billion or 90% of India’s South Asian exports in the 2024/25 fiscal year, according to commerce ministry data.
Currently, Indian banks operating abroad are limited to offering loans in foreign currencies, primarily catering to Indian companies. If approved, the new framework would mark the first time Indian rupee-denominated credit is extended to non-resident foreign borrowers for trade purposes, aiming to reduce reliance on government-backed credit lines and currency swap arrangements.
“The objective is to allow commercial banks to provide rupee liquidity on market terms,” one source noted, referring to RBI communications from April.
This initiative aligns with the RBI’s ongoing efforts to internationalise the rupee. Recent steps include allowing non-resident rupee accounts outside India and pushing for the removal of limits on foreign banks using vostro accounts to purchase short-term Indian sovereign debt.
The move could significantly ease trade settlements in rupees, shielding businesses from foreign exchange volatility. According to sources, multiple financial institutions have already approached the government with requests to use rupee-denominated financing for strategic projects abroad.
India’s experiences with local currency arrangements — including those with the UAE, Indonesia, Maldives, and special rupee vostro accounts for trade with Bangladesh and Sri Lanka — have highlighted the need for a broader and more flexible rupee lending framework.
If implemented, this policy would mark a major milestone in positioning the Indian rupee as a credible and widely-used currency in the global financial system.