RBI Moves to Internationalise INR
The Reserve Bank of India (RBI) is making strides towards internationalising the Indian Rupee. Recently, the RBI sought approval from the Government of India to allow domestic banks to lend rupees to overseas borrowers. This initiative aims to enhance the use of the rupee in international trade, particularly with neighbouring countries.
Proposal
The RBI’s proposal suggests that domestic banks and their foreign branches lend in rupees to non-residents. Initially, this would focus on neighbouring countries such as Bangladesh, Bhutan, Nepal, and Sri Lanka. If successful, this could eventually extend to global cross-border transactions. Currently, Indian banks can only provide loans in foreign currencies, primarily to Indian firms.
Trade Context
In the fiscal year 2024-25, India’s exports to South Asia amounted to approximately $25 billion. Notably, 90% of these exports were directed towards Bangladesh, Bhutan, Nepal, and Sri Lanka. This marks the potential market for rupee-denominated lending in these regions.
Strategic Steps by RBI
Over recent years, the RBI has implemented various measures to promote the rupee in foreign transactions. The central bank has allowed non-residents to open rupee accounts outside India. Furthermore, it has sought to remove caps on foreign banks with vostro accounts buying short-term sovereign debt. These steps aim to boost rupee-denominated investments and trade.
Current Lending Restrictions
At present, the foreign branches of Indian banks are limited to providing loans in foreign currencies. This restriction hampers the potential for rupee transactions in international trade. The proposed lending in rupees aims to facilitate trade settlements and reduce exposure to foreign exchange volatility.
Reducing Reliance on Government Support
Currently, rupee liquidity in other countries is available only through a limited number of government-backed credit lines or bilateral currency swap arrangements. The RBI’s objective is to reduce this dependence and allow commercial banks to provide rupee liquidity based on market conditions.
Previous Initiatives
India has previously entered into local currency agreements with countries like the United Arab Emirates, Indonesia, and the Maldives. These agreements have demonstrated the feasibility of increasing transactions in local currencies, including the Indian Rupee. The RBI’s recent moves are part of a broader strategy to deepen the availability of rupee liquidity in international markets.
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