Winding up the clock of India-Nepal economic ties

On October 1, 2025, the Reserve Bank of India (RBI) Governor Sanjay Malhotra, in the context of internationalising the Indian rupee (INR), announced three measures that have the potential of adding serious positivity in India-Nepal ties.

The first is to allow authorised dealer (AD) banks to lend the INR to non-residents from Nepal, Bhutan and Sri Lanka for cross-border transactions. The second is that the RBI is now going to allow Special Rupee Vostro Accounts, which are accounts of foreign banks with Indian banks in INR, for investment in corporate bonds and commercial papers. This is in addition to the already permitted investments in central government securities. And, the third is to establish a transparent reference rate for currencies of India’s major trading partners to facilitate INR-based transactions.

For years, India and Nepal have kept the INR to Nepalese rupee (NPR) exchange pegged at 1.6. There are demands in certain quarters for institutional credit, which are not unfounded as it is this peg that has shielded the NPR from serious depreciation against hard currencies. But it is also worth noting that what is working should not be attempted to be fixed.

The RBI allowing ADs to lend INRs to Nepal should greatly help Nepal in its bilateral trade with India. This is because the Nepalese industry has a lot to gain in overcoming the chronic challenges that it faces for working capital and scalability in the domestic market and in trade with India. Of course, the lending policies of Indian banks and their interest rates would need to be competitive for Nepalese interest.

The hurdles in Nepal

Nepal saw a partial recovery from the COVID-19 induced lockdown based on high remittances but that did not sustain, and its industrial performances continued to be in a tailspin. A key reason was the lack of confidence of Nepalese banks to lend to businesses. Stringent lending considerations by Nepalese banks (mostly controlled by Nepal’s big industrial houses) made it even more difficult for small businesses to get the required working capital to sustain and survive. The lack of confidence even made big businesses, with easy access to institutional credit, jittery, with obstacles having crept into their supply chains linked to domestic ancillaries, all of which was compounded by low domestic demand.

These hurdles created structural flaws, leading to economic woes for its population; high unemployment was certainly a big contributing factor in the latest political developments in Nepal.

India’s lending outreach should give traction to Nepalese businesses as trade with India should now be devoid of institutional credit hassles. With the United States having announced a tariff of only 10% for Nepal, INR-financed trade with India can lead its imports for value addition in Nepal, build up a global capacity for ancillaries and even explore joint ventures with India.

Trade with India

Indian firms continue to be among the largest investors in Nepal, accounting for 33% of the total foreign direct investment (FDI) stock in Nepal, worth nearly $670 million. Nepal is India’s 17th largest export destination, up from 28 in 2014. India constitutes 65% of Nepalese international trade, including $8 billion of exports from India to Nepal and just under $1 billion exports from Nepal to India. India is Nepal’s largest export destination, receiving an overwhelming 67% of its total exports consisting of edible oil, coffee, tea and jute.

The uneven, yet interdependent, bilateral trade fundamentals demand that trade and economic cooperation between India and Nepal should see a further spurt, and for the Nepalese economy, make it less vulnerable and resilient in the topsy-turvy world of today.

Possible multiplier effects

In Nepal, there would be many who would see the RBI moves as an effort to strengthen the INR. But that notwithstanding, Nepal would certainly benefit in lowering the role of the dollar and making INR as preferred currency for trade with India, by far its largest trading partner. It will also shield the economy from the dollar’s exchange rate fluctuations. Hard currency availability issues should also ease, thereby reducing pressure on forex and the Current Account Deficit (CAD), which could lead to other advantages and have positive multiplier effects. Indeed, these currency openings should lead to wider consultations between India and Nepal on other crucial economic matters such as Nepal’s framework of sovereign guarantees (sector/project wise), Standby Letters of Credit and country risk rating.

Of course, a decoding of the RBI announcements by the Nepal Rastra Bank (NRB) would be useful and important and they may have to put in place several required instrumentalities at their end to take advantage of the Indian move and to protect their economic and money interests. Moreover, the process compliance as per RBI’s guidelines will not be something to be skipped by any potential borrowers beyond borders. The RBI has a strong reputation for keeping prudence ahead, and the NRB’s reciprocation will herald a new era for rebooting India-Nepal economic ties. India and Nepal should come closer to a level playing field.

Manjeev Singh Puri is India’s former Ambassador to Nepal. Atul K. Thakur is a policy professional, columnist and writer with a special focus on South Asia. The views expressed are personal