The Reserve Bank of India (RBI) recently announced a series of reforms aimed at deepening financial markets and promoting the internationalisation of the Indian rupee. These measures mark a strategic shift in India’s financial policy, focusing on regional influence and corporate growth amid rising global trade tensions and geopolitical uncertainties.
Internationalisation of the Rupee
The RBI has allowed Indian banks and their overseas branches to extend rupee-denominated loans to residents of neighbouring countries like Nepal, Bhutan, and Sri Lanka. This step aims to reduce dollar dependence in regional trade and promote the rupee as a credible settlement currency. It is part of a broader strategy to build the rupee’s stature beyond India’s borders and establish regional dominance in trade and finance.
Enhancing Forex Market Efficiency
The RBI plans to expand the list of currencies benchmarked by Financial Benchmarks India Limited (FBIL). Currently limited to the US dollar, euro, pound, and yen, the addition of more trading partner currencies will encourage banks to quote a wider range of forex pairs. This move will reduce inefficiencies caused by routing trades through the dollar and deepen the rupee’s market liquidity.
New Lending Facilities and Market Deepening
The RBI has increased the lending limit for IPO financing from Rs 10 lakh to Rs 25 lakh and raised the loan against shares limit to Rs 1 crore from Rs 20 lakh. It has also removed the ceiling on lending against listed debt securities. These changes aim to boost primary markets and reflect banks’ improved capacity to manage risk. Additionally, surplus balances in Special Rupee Vostro Accounts can now be invested in corporate bonds and commercial papers, enhancing liquidity in India’s corporate debt market.
Allowing Banks to Finance Corporate Takeovers
For the first time, banks are permitted to finance corporate acquisitions, a domain traditionally dominated by non-banking financial companies and bond markets. This reform is expected to facilitate faster corporate consolidation and expansion by providing structured loans at lower costs. The RBI will implement safeguards to prevent misuse and ensure financial stability. This change also responds to banking sector demands to diversify loan portfolios and support corporate growth.
Monetary Policy and Risk Management
The RBI maintained the repo rate at 5.5% with a neutral monetary stance. It proposed scrapping the 2016 framework restricting bank lending to large borrowers above Rs 10,000 crore. Credit concentration risks will be managed through the Large Exposure Framework and macro-prudential tools. This reflects the RBI’s confidence in India’s economic resilience and institutional strength to handle increased financial freedoms.
Geopolitical and Economic Implications
These reforms come amid heightened global trade frictions, especially between India and the US, and debates over alternatives to the US dollar as a global currency. By promoting the rupee’s regional use and enabling banks to support corporate growth, the RBI aims to position India as a more influential player in global finance. This strategy balances ambition with caution, recognising risks but signalling a readiness to engage more actively in the evolving financial landscape.
Questions for UPSC:
- Critically discuss the challenges and opportunities in the internationalisation of the Indian rupee in the context of global currency dynamics.
- Examine the role of central banks in managing credit concentration risks and ensuring financial stability during economic liberalisation.
- Analyse the impact of regional trade agreements on currency usage and financial integration, with examples from South Asia.
- Estimate the effects of allowing banks to finance corporate takeovers on economic growth and market stability in emerging economies.
