The financial landscape for cross-border trade between Bhutan and India is set for a significant uplift following a recent decision by the Reserve Bank of India (RBI). The RBI’s revised norms now allows Indian banks and their overseas branches to extend rupee-denominated loans to individuals, entities, and peer banks in Bhutan, Nepal, and Sri Lanka.
The move, announced as part of the RBI’s continuous effort to facilitate external trade and payments, specifically targets easing the settlement of cross-border transactions. For Bhutan, whose economy and currency, Ngultrum (BTN)), are pegged to the Indian Rupee (INR), the ability for local businesses and banks to access rupee credit directly from Indian banks marks an essential development.
According to the RBI, this regulatory update is expected to benefit multiple stakeholders. Importers and exporters in these countries will gain easier access to rupee credit facilities, enabling faster settlement of trade transactions. “Banks in Bhutan, Nepal, and Sri Lanka will be able to facilitate their clients’ trade with India more efficiently. Additionally, Indian AD banks will see an expansion in their international lending portfolio, thereby increasing their regional presence and financial integration.”
“The country relies heavily on India, its largest trading partner, for a significant majority of its imports, including fuel, vehicles, and construction materials. Historically, this relationship has periodically brought challenges related to INR liquidity, where a shortage of the currency in the formal banking channels has created friction for importers and threatened the stability of the pegged exchange rate,” an expert in the Bhutanese financial market explained.
She said that under the new framework, the direct lending facility in INR is expected to provide an immediate and more accessible source of funding for Bhutanese entities. “This is anticipated to facilitate Bhutanese importers secure rupee loans directly from Indian banks to pay for goods, bypassing the need for commercial banks in Bhutan to always dip into their limited foreign exchange reserves or seek short-term currency swaps to meet the demand.”
She reiterated, “Additionally, by promoting the use of the rupee in direct lending, the reliance on third-currency (like the US Dollar) transactions, which incur additional conversion costs and exchange rate risks, will be significantly reduced for bilateral trade.”
In simple terms, with the new RBI framework, Bhutanese importers can now secure INR directly from Indian banks, instead of depending on local banks to dip into their limited reserves or arrange short-term swaps. This direct access to INR will not only ease funding pressure but also cut out the need to route payments through currencies like the US Dollar, reducing both conversion costs and exchange rate risks in Bhutan-India trade.
Further, the revision encourages greater operational links between the banking systems of the two nations, providing Bhutanese banks with an alternative channel for liquidity management. In other words, it is likely to deepen institutional connectivity between Bhutanese and Indian banks beyond trade settlements. By allowing direct rupee-denominated lending, the policy creates room for greater operational linkages—such as correspondent banking relationships, credit lines, and coordinated liquidity support. This is particularly significant for Bhutan, where banking institutions have historically relied on limited INR reserves or central bank arrangements during periods of high import demand. With access to Indian banks as an additional liquidity channel, Bhutanese financial institutions gain a more flexible and market-based tool to manage rupee flows, easing pressure on the Royal Monetary Authority and enhancing resilience against currency shortages.
While the immediate impact on Bhutan’s persistent trade deficit with India remains to be seen as the underlying demand for imports remains high, the ability to finance these imports through a new, formal credit channel is expected to inject a much-needed degree of stability and predictability into trade finance. “This means that trade financing between the two countries is getting so much attention from their respective governments which could only strengthen the existing bond to fight back any future offsets, together,” another expert seconded her thoughts.
For India, the regulatory change is part of a broader, strategic goal to gradually internationalize the Indian Rupee, positioning it as a regional currency for trade and investment. For Bhutan, this initiative strengthens a long-standing relationship where India has consistently provided support through various financial instruments, including currency swap agreements and Standby Credit Facilities, to manage the country’s INR requirements.
Nidup Lhamo
From Thimphu
