ECONOMYNEXT – The Reserve Bank of India has allowed Indian banks to given loans to customers in Sri Lanka Bhutan and Nepal denominated in Indian rupees.
Branches of Indian banks in Sri Lanka would also be allowed to give Indian rupee loans to banks in the island or to individuals.
“This development will make credit more accessible for businesses in Sri Lanka,” the Indian embassy in Colombo said.
“The provision allowing such loans to be denominated in Indian Rupees will be particularly beneficial for Sri Lankan businesses, reducing exchange rate risks and strengthening cross-border trade and financial linkages between the two countries.”
Analysts say Sri Lankan borrowers in India may benefit compared to borrowing in US dollars due to steady deprecation of the India rupee – especially since 2011 after the RBI’s monetary anchor was shifted from wholesale price index to retail- though interest rates may be higher.
India is a large source of imports for Sri Lanka. As long as Indian exporters are willing to receive Indian rupees like US exporters or Russia, not just trade finance but actual trade could be conducted in Indian currency, analysts say.
Sri Lanka also has a bad credit rating after the worst currency crisis which can make foreign borrowings expensive.
During the last crisis, Indian banks confirmed Sri Lanka LCs, while Indian food exporters shipped goods without letters of credit against informal arrangements.
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But SriLankan banks are now flushed with US dollars – after the Central Bank of Sri Lanka stopped printing money and missed its high 5 percent inflation target, preventing the destruction of capital – and are financing Indian banks and firms.
The Indian rupee – originally silver based – was the ‘dollar’ of South Asia, part of the Middle East including present day Dubai and Qatar under British administration as well as parts of North Africa informally.
Sri Lanka (then Ceylon) also had a currency board with Indian rupee following an economic crisis that led to the failure of one of two note-issue banks in 1884, (Mauritius had the first currency board).
The Reserve Bank of India was set up in 1935 to take the country to the gold standard.
The RBI was nationalized in 1949 and monetary troubles began soon after as it was mis-used for Cambridge economics and financing 5-year plans, leading to currency crises, and the economy was gradually closed and the overseas use of the Indian rupee petered out.
In 1949, the Sterling suffered a massive devaluation in the wake of Cambridge style (full employment/potential output) economics of the Atlee administration under Chancellors of Exchequer, Cambridge economist/Fabian Hugh ‘Comrade’ Dalton, and ‘Little’ Hugh Gaitskell (also a Fabian) taking the Indian and Sri Lankan rupees with it.
The Indian rupee (a separate Gulf Rupee was set up due to mistaken ideas of money) devalued steeply again on 06 June 1966.
Middle Eastern countries like Dubai and Qatar set up a true currency board just as the Indian rupee devalued and has had strong currencies and now operate modified currency-board-like arrangements (no ‘monetary policy’) and employ millions of Indians amid monetary and political stability.
Former users of Indian rupee like Dubai also avoided the 1967 devaluation of Sterling. (Colombo/Oct13/2025)
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