RBI's Lending Easing: A Bold Step Toward Rupee Globalization or a Risky Gamble?

The Reserve Bank of India has taken an ambitious leap forward with its latest package of reforms aimed at internationalizing the rupee, marking what could be either a strategic masterstroke for India's economic sovereignty or a calculated risk that might backfire amid global uncertainties. As the Indian economy grapples with a post-2024 growth slowdown and mounting external pressures, these measures represent the central bank's most comprehensive attempt yet to position the rupee as a credible alternative to the US dollar in international trade.

The Big Picture: A Multi-Pronged Rupee Push

The RBI's October 2025 announcement unveiled three significant initiatives designed to enhance the rupee's global footprint. First, authorized dealer banks can now extend rupee-denominated loans to non-residents from Bhutan, Nepal, and Sri Lanka for cross-border trade activities. This move directly targets India's immediate neighbors, where 90% of India's South Asian exports—totaling nearly $25 billion in 2024-25—are concentrated.

Second, the central bank plans to establish transparent reference rates for currencies of major trading partners, including the Indonesian rupiah and UAE dirham. Currently, the RBI publishes reference rates only for the US dollar, euro, Japanese yen, and British pound. These new benchmarks aim to facilitate direct rupee-based transactions without requiring conversion through third currencies, potentially reducing transaction costs and currency risks for businesses.

The third and perhaps most significant measure expands the investment options for Special Rupee Vostro Accounts (SRVAs). Previously restricted to government securities and treasury bills, surplus balances in these accounts can now be deployed in corporate bonds and commercial papers. This expansion provides foreign banks with higher-yield investment opportunities while channeling additional liquidity into India's corporate debt market.

The Optimistic Vision: Economic Sovereignty and Stability

Proponents of rupee internationalization see these measures as essential steps toward reducing India's vulnerability to external currency shocks. The benefits are compelling: reduced dependence on foreign currencies like the US dollar could shield the economy from global crises and currency shortages. By settling trade in rupees, Indian businesses would face lower hedging costs and protection from currency volatility, potentially boosting their global competitiveness.

The timing appears strategic. With over 80 SRVAs already operational across more than 20 countries, India has built a substantial infrastructure for rupee-based trade settlement. The recent policy changes remove regulatory friction—banks no longer need prior RBI approval to open SRVAs for correspondent partners—while maintaining compliance safeguards.

The economic logic is sound. Global acceptance of the rupee would allow India to issue debt in its own currency to international investors, making deficit financing easier without exchange rate risks. This "exorbitant privilege" currently enjoyed primarily by the US could significantly enhance India's fiscal flexibility and reduce the need to maintain large foreign exchange reserves in convertible currencies.

The Cautionary Perspective: Risks and Vulnerabilities

However, these ambitious moves carry substantial risks that cannot be overlooked. The most immediate concern is increased currency volatility. As one analysis notes, rupee internationalization "may result in a potential increase in volatility of its exchange rate in the initial stages". Large foreign participation could destabilize equity or debt markets if not properly regulated, potentially complicating monetary policy management.

The inflationary implications are particularly worrying given India's economic context. The country's growth has slowed dramatically from 8.2% in 2023-24 to an estimated 6.4-6.5% for 2024-25—the slowest pace since the COVID-hit 2020-21 fiscal year. This deceleration reflects weakening manufacturing and construction activity, with only agriculture showing resilience. In this environment, any additional inflationary pressures from currency volatility could further complicate the RBI's policy balancing act.

The debt sustainability question looms large. While rupee internationalization could ease deficit financing, it also exposes India to the whims of foreign investors. If international confidence in the rupee wavers, capital flight could occur more rapidly and severely than under the current dollar-dependent system, potentially creating debt crises during periods of global uncertainty.