Syllabus: India and its neighborhood- relations
Recent RBI Announcements
- RBI Governor Sanjay Malhotra announced three measures for internationalizing Indian rupee (INR).Â
- Authorized Dealer (AD) banks can lend INR to non-residents from Nepal, Bhutan, Sri Lanka.
- Special Rupee Vostro Accounts allowed for investment in corporate bonds and commercial papers.
- Vostro Accounts are foreign bank accounts with Indian banks in INR for transactions.
India-Nepal Currency Arrangement
- INR to Nepalese rupee (NPR) pegged at 1.6 for years maintaining currency stability.
- Peg shields NPR from serious depreciation against hard currencies like US dollar.
- RBI lending INRs will help Nepal in bilateral trade with India significantly.
- Nepalese industry can overcome chronic working capital and scalability challenges in domestic/India trade.
Nepal’s Economic Challenges
- Partial COVID-19 recovery based on high remittances did not sustain long-term growth.
- Lack of confidence by Nepalese banks in lending to businesses hampered industrial performance.
- Stringent lending considerations by Nepal’s banks (controlled by big industrial houses) affected businesses.
- Small businesses struggled getting required working capital for sustenance and survival amid challenges.
- Supply chain obstacles in domestic ancillaries compounded by low domestic demand persisted.
- High unemployment contributed to latest political developments and instability in Nepal.
India’s Role in Nepal Economy
- Indian firms account for 33% FDI stock in Nepal worth nearly $670 million.
- Nepal is India’s 17th largest export destination (up from 28th in 2014).
- India constitutes 65% of Nepal’s international trade volume with strong bilateral linkage.
- India exports $8 billion to Nepal; Nepal exports $1 billion to India annually.
- India receives 67% of Nepal’s exports: edible oil, coffee, tea, jute as major commodities.
Benefits and Multiplier Effects
- INR lending provides traction to Nepalese businesses removing institutional credit hassles in trade.
- US announced 10% tariff for Nepal; INR-financed trade can boost value addition capacity.
- Nepal can build global ancillary capacity, explore joint ventures with Indian companies.
- Makes INR preferred currency for trade, reducing dollar dependence and exchange fluctuations.
- Eases hard currency availability, reducing pressure on forex and Current Account Deficit (CAD).
- Could lead to consultations on sovereign guarantees, Letters of Credit, country risk rating.
Implementation Requirements
- Nepal Rastra Bank (NRB) must decode RBI announcements and establish required instrumentalities. The process compliance as per RBI guidelines is mandatory for potential borrowers beyond Indian borders.
- The RBI has a strong reputation for keeping prudence ahead, and the NRB’s reciprocation will herald a new era for rebooting India-Nepal economic ties.
- Both nations should come closer to level playing field through enhanced economic cooperation.
Q- Discuss the asymmetric nature of Indo-Nepal trade relations and suggest measures to create a more balanced economic partnership.(10 Marks)