Operationalization of Rupee Internationalization: UPSC Current Affairs Story Arc

Overview

This arc tracks the strategic evolution of the Indian Rupee (INR) from a domestic currency to an international medium of exchange and investment. It began with the RBI seeking government approval to lend Rupees to neighboring nations (Bangladesh, Bhutan, Nepal, and Sri Lanka) to facilitate trade. To support this, the RBI introduced transparent reference rates for trading partners' currencies, reducing conversion costs. By October 2025, the framework was formalized, allowing domestic banks to lend in INR to non-residents and permitting the investment of Special Rupee Vostro Account (SRVA) balances into Indian corporate bonds. The arc culminates in early 2026 with SBI Tel Aviv operationalizing this framework to handle India-Israel trade, proving that Rupee internationalization is moving beyond the neighborhood to strategic global partners.

How This Story Evolved

RBI seeks approval for Rupee loans (Item 8) & plans reference rates (Item 9) → RBI notifies permissions and expands SRVA usage (Item 1) → SBI utilizes SRVA framework to promote trade with Israel (Seed)

1. 2025-05-28: RBI to Allow Rupee Loans to Neighbors
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   UPSC Angle: RBI proposes allowing rupee loans to neighboring countries.

   Key Facts:

   • RBI seeks nod to allow Rupee loans to neighboring nations.
   • Targets Bangladesh, Bhutan, Nepal, and Sri Lanka.
   • 90% of India's exports to South Asia in 2024/25 were to these four countries, totaling nearly $25 billion.
2. 2025-08-30: RBI to Introduce Reference Rates for Currency
   More details

   UPSC Angle: RBI to introduce reference rates to promote trade in rupees.

   Key Facts:

   • RBI to introduce reference rates for currencies
   • Objective: Promote trade settlements in rupees
   • Bhutan, Nepal and Sri Lanka can be lended in rupees
3. 2025-10-27: RBI Initiatives for Internationalizing INR
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   UPSC Angle: RBI initiatives for internationalizing INR.

   Key Facts:

   • RBI permits AD banks to lend in INR to non-residents from Bhutan, Nepal, and Sri Lanka for cross-border trade.
   • RBI is establishing transparent reference rates for currencies of India's major trading partners to facilitate INR based transactions.
   • RBI permits wider use of Special Rupee Vostro Accounts (SRVA) balances for investment in corporate bonds and commercial papers.
4. 2026-01-09: India Promoting Rupee Trade with Israel
   More details

   UPSC Angle: SBI promoting Rupee trade with Israel.

   Key Facts:

   • SBI promoting India-Israel trade in rupees
   • Israeli entities can use INR through SBI's Special Rupee Vostro Account (SRVA)
   • SBI Tel Aviv organized meetings with Israel-India Chamber of Commerce

Genesis

Trigger

On May 28, 2025, the RBI formally sought government approval to allow domestic banks and their foreign branches to lend Rupees to overseas borrowers in neighboring countries for the first time.

Why Now

India's growing trade footprint in South Asia ($25 billion exports to the targeted four countries) and the need to reduce reliance on the US Dollar amidst global volatility made INR-settlement a strategic priority.

Historical Context

Traditionally, India has been cautious with Rupee lending due to concerns over capital account volatility. This marks a departure from the 'partial capital account convertibility' mindset toward a more proactive international role.

Key Turning Points

1. [2025-10-27] RBI permits wider use of SRVA balances for investment in corporate bonds.

   It provided a 'use case' for idle Rupee balances held by foreign banks, making it profitable for them to hold INR.

   Before: SRVA was strictly for trade settlement. After: SRVA became an investment channel into Indian debt markets.

Key Actors and Institutions

Key Institutions

• Reserve Bank of India (RBI)
• State Bank of India (SBI)
• Israel-India Chamber of Commerce
• Ministry of Finance (Government of India)

Key Concepts

Special Rupee Vostro Account (SRVA)

An account held by a foreign bank with a domestic bank in the domestic currency (INR) to facilitate international trade settlements.

Current Fact: On Jan 9, 2026, Israeli entities began using SBI's SRVA to make and receive payments in INR for goods and services.

Reference Rates

Standardized exchange rates established by a central bank for specific currency pairs to ensure transparency and lower conversion costs in trade.

Current Fact: RBI announced the establishment of reference rates for major trading partners on August 30, 2025.

Internationalization of Rupee

The process of increasing the use of the local currency in cross-border transactions, including trade, investment, and as a reserve currency.

Current Fact: RBI permitted the use of SRVA balances for investment in corporate bonds and commercial papers by October 27, 2025.

What Happens Next

Current Status

As of January 9, 2026, SBI Tel Aviv has successfully operationalized the SRVA framework, allowing Israeli entities to settle trade in INR, coinciding with FTA discussions.

Likely Next

Expansion of INR-lending facilities to larger trading partners like the UAE or Russia, and potential inclusion of INR in the SDR (Special Drawing Rights) basket long-term.

Wildcards

Significant INR depreciation could deter foreign entities from holding Rupee balances; conversely, a sudden US Dollar liquidity crunch could accelerate global adoption.

Why UPSC Cares

Syllabus Topics

• Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
• External Sector: Balance of Payments, Currency Convertibility.

Essay Angles

• The Geopolitics of De-dollarization: India's Role.
• Currency as an Instrument of Soft Power in Neighborhood First Policy.

Prelims Likely: Yes

Mains Likely: Yes

Trend Signal: rising

Exam Intelligence

Previous Year Question Connections

• Definition of a Rupee Vostro account. — The arc shows the functional evolution of the SRVA from a banking tool to a trade-settlement powerhouse.
• Trends in trade between India and neighbors (Bangladesh, Nepal, Sri Lanka). — Directly relevant as the RBI's May 2025 move targets these exact four countries which account for 90% of India's South Asian exports.

Prelims Angles

• RBI permits lending in INR to non-residents specifically from Bhutan, Nepal, and Sri Lanka (Current Fact: Oct 2025).
• SRVA balances can now be invested in Corporate Bonds and Commercial Papers, not just government securities.
• SBI Tel Aviv is the only Indian bank operating in Israel as of 2026.

Mains Preparation

Sample Question: Analyze the strategic and economic significance of the internationalization of the Indian Rupee. How do recent RBI initiatives like the Special Rupee Vostro Account (SRVA) and Rupee-denominated lending to neighboring nations strengthen India's external sector resilience?

Answer Structure: Intro: Define Rupee Internationalization and mention the $25B export context. → Body 1: Discuss the RBI's three-pronged strategy (Lending to neighbors, Reference rates, Investment in bonds). → Body 2: Strategic benefits (reduced FX volatility, lower transaction costs, neighborhood first). → Critical Analysis: Challenges like capital account volatility and global acceptance. → Way Forward: Gradual shift toward full capital account convertibility and deep bond markets.

Essay Topic: The Emergence of the Rupee: Navigating a Multipolar Financial World.

Textbook Connections

Key Takeaway

The Rupee is transitioning from a domestic currency to a regional trade anchor and a credible investment asset through the strategic use of SRVA and cross-border lending.

All Events in This Story (4 items)

1. 2025-05-28 [Economy] — RBI to Allow Rupee Loans to Neighbors
   The Reserve Bank of India (RBI) is seeking government approval to allow domestic banks and their foreign branches to lend Rupees to overseas borrowers for the first time. The proposal targets neighboring countries such as Bangladesh, Bhutan, Nepal, and Sri Lanka. 90% of India's exports to South Asia in 2024/25 were to these four countries, totaling nearly $25 billion.
   More details

   UPSC Angle: RBI proposes allowing rupee loans to neighboring countries.

   Key Facts:

   • RBI seeks nod to allow Rupee loans to neighboring nations.
   • Targets Bangladesh, Bhutan, Nepal, and Sri Lanka.
   • 90% of India's exports to South Asia in 2024/25 were to these four countries, totaling nearly $25 billion.
2. 2025-08-30 [Economy] — RBI to Introduce Reference Rates for Currency
   The Reserve Bank of India (RBI) is planning to introduce reference rates for the currencies of India's biggest trading partners to promote more trade settlements in rupees. The aim is to deepen the onshore forex market, reduce the need for multiple currency conversions, and make trade settlements more efficient and cost-effective.
   More details

   UPSC Angle: RBI to introduce reference rates to promote trade in rupees.

   Key Facts:

   • RBI to introduce reference rates for currencies
   • Objective: Promote trade settlements in rupees
   • Bhutan, Nepal and Sri Lanka can be lended in rupees
3. 2025-10-27 [Economy] — RBI Initiatives for Internationalizing INR
   RBI is permitting AD banks to lend in INR to non-residents from Bhutan, Nepal, and Sri Lanka, establishing transparent reference rates for currencies of India's major trading partners, and permitting wider use of SRVA balances for investment in corporate bonds and commercial papers to promote the internationalization of the Indian Rupee (INR).
   More details

   UPSC Angle: RBI initiatives for internationalizing INR.

   Key Facts:

   • RBI permits AD banks to lend in INR to non-residents from Bhutan, Nepal, and Sri Lanka for cross-border trade.
   • RBI is establishing transparent reference rates for currencies of India's major trading partners to facilitate INR based transactions.
   • RBI permits wider use of Special Rupee Vostro Accounts (SRVA) balances for investment in corporate bonds and commercial papers.
4. 2026-01-09 [Economy] — India Promoting Rupee Trade with Israel
   SBI, the only Indian bank in Israel, is promoting bilateral trade between India and Israel in Indian rupees (INR) as Free Trade Agreement (FTA) discussions gain momentum. Israeli entities can now make and receive payments in INR through SBI's Special Rupee Vostro Account (SRVA) for exports/imports of goods and services.
   More details

   UPSC Angle: SBI promoting Rupee trade with Israel.

   Key Facts:

   • SBI promoting India-Israel trade in rupees
   • Israeli entities can use INR through SBI's Special Rupee Vostro Account (SRVA)
   • SBI Tel Aviv organized meetings with Israel-India Chamber of Commerce