RBI’s Reforms – Towards Internationalising the Rupee and Deepening Financial Markets

RBI’s Reforms Latest News

• At a time when India faces rising trade frictions with the US and heightened global debate on alternatives to the dollar, the Reserve Bank of India (RBI) has announced significant measures.
• These aims to strengthen financial markets, boost corporate financing options, and take concrete steps towards internationalising the rupee.

Key Announcements by the RBI

• Monetary policy decisions: The RBI kept the repo rate unchanged at 5.5% and monetary policy stance ‘neutral’.
• Expanding role of banks in corporate consolidation:
  • Takeover financing: Banks allowed to finance corporate acquisitions, previously restricted due to risk concerns.
  • Impact: Opens a structured, low-cost financing channel for mergers and acquisitions, enhancing competitiveness and capital expenditure.
  • Safeguards: Risk-control measures to ensure funds are used productively.
  • Relevance: Aligns with Insolvency and Bankruptcy Code (IBC) framework and helps corporates consolidate faster.
• Rupee internationalisation measures:
  • Cross-border lending in rupees: Indian banks and their overseas arms are allowed to lend in rupees to residents or institutions in neighbouring countries (Nepal, Bhutan, Sri Lanka).
  • Objective: Reduce dollar dependence, strengthen regional financial influence, and build confidence in rupee stability.
  • Geopolitical context: Comes amid US threats against BRICS currency initiatives and global debates on dollar dominance.
• Boosting market depth and liquidity:
  • IPO financing: The RBI proposed increasing the lending limit for IPO financing to Rs 25 lakh from Rs 10 lakh.
  • Loan against shares: It also raised the limit on loan against shares to Rs 1 crore from Rs 20 lakh (last revised in 1998).
  • Loan against listed debt: Ceiling removed to promote bond market activity.
  • SRVA surplus use: Surplus balances in Special Rupee Vostro Accounts (SRVAs) can now be invested in corporate bonds and commercial papers, enhancing liquidity.
• Expanding forex benchmarking:
  • Expanding the list of currencies: Benchmarked by the Financial Benchmarks India Limited (FBIL), adding more currencies beyond USD, Euro, Pound, Yen.
  • Significance: Reduces inefficiencies of dollar routing, deepens rupee market, strengthens rupee as a trading and settlement currency.
• Relaxation of large borrower lending framework:
  • 2016 restrictions scrapped: Banks can lend more freely to large corporates with exposures above ₹10,000 crore.
  • Risk management: Individual bank risks addressed under the Large Exposure Framework; system-wide risks to be managed with macro-prudential tools.

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Broader Implications of the Latest RBI’s Reforms

• Corporate sector: Access to structured takeover financing strengthens India Inc.’s competitiveness.
• Banking sector: Greater role in corporate growth stories, diversification of loan books, and higher returns.
• Financial markets: Deeper IPO financing, bond market growth, and improved liquidity.
• Regional economy: Moves to internationalise the rupee enhance India’s financial influence in South Asia.
• Geopolitics: Strategic push for rupee amid US dollar dominance debates and BRICS alternative currency discourse.

Way Forward

• Strengthen risk management: Ensure safeguards against reckless corporate borrowing and asset bubbles.
• Promote regional adoption of rupee: Expand bilateral and multilateral trade settlements in rupee.
• Boost investor confidence: Deepen corporate bond markets and ensure transparency in forex benchmarks.
• Gradual integration: Move cautiously to avoid external shocks while pushing rupee internationalisation.

Conclusion

• The RBI’s latest reforms mark a decisive shift from a conservative, inward-looking financial system to one aspiring for regional dominance and global relevance, signalling confidence in India’s economic resilience. 
• These reforms carry risks but reflect a larger ambition: to make the rupee travel beyond borders and empower Indian corporates to expand their global footprint, thereby strengthening India’s financial sovereignty in an evolving multipolar world.

Source: IE