RBI Requests Government Approval to Permit Indian Banks to Loan Rupees to Foreign Borrowers
Proposal for Lending in Rupees to Non-Residents
A recent proposal has been put forth advocating that domestic banks and their international branches be permitted to extend loans in Indian rupees to non-residents in neighboring nations such as Bangladesh, Nepal, Sri Lanka, and Bhutan. This initiative marks a significant move by the Reserve Bank of India (RBI) towards enhancing the international use of the rupee.
Seeking Government Approval
According to a report by Reuters, the RBI has requested government approval to enable local banks to offer loans in rupees to borrowers located abroad. Reports indicate that this proposal was submitted to the Finance Ministry last month. The Indian government has been striving for some time to promote the use of the Indian currency in international transactions, particularly with neighboring countries that maintain amicable relations with India.
Implications of the Initiative
Currently, the foreign branches of Indian banks are limited to lending in foreign currencies, primarily catering to Indian enterprises. However, if the initiative to allow overseas bank lending in rupees proves successful, it could pave the way for conducting international trade transactions in Indian rupees. Ministry of Commerce data reveals that in the 2024-25 fiscal year, India’s exports to Bangladesh, Nepal, Sri Lanka, and Bhutan reached $25 billion.
Recent Strategic Developments
In recent years, the RBI has implemented various measures to promote the acceptance of the rupee in global transactions. For instance, the central bank recently permitted the establishment of rupee accounts for non-residents outside of India. Earlier this month, the RBI sought governmental consent to eliminate the limitations on foreign banks holding vostro accounts from purchasing short-term sovereign debt, aiming to stimulate investments and trade denominated in rupees. A vostro account refers to a bank account that a domestic bank maintains for a foreign bank.
Market-Driven Liquidity Solutions
At present, rupee liquidity in other nations is predominantly facilitated through a select few government-supported credit lines or currency swap agreements. A source cited by Reuters mentioned that the central bank aims to lessen reliance on such arrangements and empower commercial banks to offer rupee liquidity based on market conditions.
Enhancing Currency Transactions with Neighbors
India has been actively pursuing various agreements with its neighboring countries to foster transactions in Indian rupees. In January, the RBI entered into a Memorandum of Understanding with the central banks of Indonesia, the Maldives, and the United Arab Emirates to amplify transactions in local currencies, including the rupee.
