By: Staff Writer
May 29, Colombo (LNW):In a move that could significantly impact Sri Lanka’s trade and financial ties with India, the Reserve Bank of India (RBI) has proposed allowing Indian banks to lend directly in rupees to overseas borrowers, with Sri Lanka among the key target countries.
The proposal, submitted by the RBI to India’s Finance Ministry last month, seeks approval for domestic banks and their foreign branches to issue rupee-denominated loans to non-resident borrowers. The initiative is part of India’s broader strategy to internationalise the rupee and promote its use in regional trade.
Sri Lanka, along with Bangladesh, Nepal, and Bhutan, has been identified as a priority in this initiative due to its strong trade links with India. According to India’s Ministry of Commerce, nearly 90% of its South Asian exports in 2024/25—worth approximately $25 billion—were directed to these four nations.
If approved, the policy could provide Sri Lankan businesses with an alternative source of financing in rupees, potentially reducing their dependence on U.S. dollars for trade settlements with India. It would also mark a shift in India’s lending approach, as Indian banks’ overseas branches are currently only allowed to issue loans in foreign currencies, primarily to Indian companies.
For Sri Lanka, which continues to recover from its recent economic crisis and foreign exchange shortages, access to rupee-based lending could help stabilise bilateral trade, improve liquidity, and reduce currency conversion costs. The move could also ease pressure on Sri Lanka’s dollar reserves while fostering deeper financial integration with India.
This is not an isolated step. The RBI has been steadily advancing a series of measures to internationalise the rupee. These include permitting non-residents to open rupee accounts outside India and, more recently, seeking government approval to remove restrictions on foreign banks with vostro accounts from investing in short-term Indian government debt.
Although no official comment has been provided by either the RBI or India’s Finance Ministry, the discussions signal a growing emphasis on positioning the rupee as a regional trade currency. Analysts believe the plan, if executed, could pave the way for broader adoption of the rupee in South Asia and potentially across other emerging markets.
For Sri Lanka, closer financial cooperation with India under this scheme could enhance trade efficiency, lower transaction costs, and provide much-needed economic flexibility—especially as the country works to rebuild its economy and diversify its financial partnerships.
