India’s latest proposal to allow Sri Lankan entities to issue bonds in Indian Rupees (INR) marks a bold shift in regional financial diplomacy one that could redefine Sri Lanka’s access to credit while also raising questions over economic sovereignty and long-term fiscal risk.
Announced by Indian Deputy High Commissioner to Sri Lanka Dr. Satyanjal Pandey at the ‘Bridging Borders II’ dialogue in Colombo, the move aims to enable both government and private sector entities in Sri Lanka to raise capital through INR-denominated bonds. Dr. Pandey described it as a “long-term vision” built on “deepening trust” between the two neighbours.
The proposal’s appeal is clear. Issuing INR bonds would give Sri Lanka and its corporates access to a wider investor base in India the world’s fastest-growing major economy while reducing dependence on costly dollar borrowings. With the rupee gaining regional prominence and India’s bond market offering high liquidity, the initiative could help Colombo diversify funding channels, lower borrowing costs, and mitigate exchange rate risks that have plagued the country’s external debt.
Yet, beneath the optimism lie considerable complexities. India’s own capital account is not fully convertible, meaning cross-border issuance in INR would require significant regulatory reforms by the Reserve Bank of India. Dr. Pandey acknowledged these “steep challenges,” including potential rupee volatility and compliance constraints under India’s external commercial borrowing rules.
Critics in Colombo also warn that greater financial alignment with India may deepen dependency and limit policy autonomy. With nearly 65% of Sri Lanka’s trade already tied to India, further financial integration could make the economy more susceptible to rupee-driven shocks. Moreover, if rupee depreciation occurs, Sri Lankan issuers could face repayment risks similar to those triggered by dollar fluctuations in the past.
Still, the timing is strategic. Sri Lanka’s economy, emerging from its worst crisis in decades, has begun to stabilize recording 5% growth in 2024 and regaining modest investor confidence after successful debt restructuring. The IMF has repeatedly urged Colombo to broaden funding options while maintaining fiscal discipline, and the INR bond route could serve that purpose.
Dr. Pandey also hinted at broader regional implications, suggesting that India’s regulators consider allowing INR bond financing for sustainable and infrastructure projects across South Asia. He pointed to the GIFT City model where DFCC Bank has already raised US$8 million as a proof of concept.
As policymakers weigh the opportunity, the initiative stands as both a promise and a test: whether Sri Lanka can harness India’s growing financial clout to rebuild stability, without surrendering too much of its own economic independence.
