Executive Summary
Vanshika Saraf is a Research Analyst with the Indo-Pacific Studies Programme. She can be reached at vanshika@takshashila.org.in.
Anupam Manur is a Professor of Economics at the Takshashila Institution. He can be reached at anupam@takshashila.org.in
This paper examines the strategic, institutional, and economic rationale for advancing rupee regionalisation in the Indian subcontinent. In a region marked by geographic proximity but underdeveloped trade and financial linkages, the persistent reliance on the US dollar for cross-border transactions introduces avoidable costs, currency mismatches, and systemic vulnerabilities. By promoting the Indian rupee (INR) as a regional settlement and invoicing currency, India can help enhance transactional efficiency and assert greater regional monetary leadership.
The analysis highlights four institutional pillars necessary for a functional rupee zone: the establishment of a Free Trade Area to expand trade volumes and reduce tariff friction; the activation of bilateral currency swap lines to provide liquidity and stabilise exchange expectations; cross-border payment system integration to lower transaction costs and support digital financial inclusion; and a phased approach toward capital and current account convertibility to enable investment mobility and currency holding incentives.
The study further underscores the potential spillover benefits of rupee regionalisation: enhanced services trade in finance, healthcare, education, and tourism; expanded access for Indian fintech and banking firms; and logistical integration through regional transport corridors and ports. At the same time, it critically addresses the drawbacks and concerns of neighbouring countries — such as strategic asymmetry, political risks, and monetary dependency on RBI policy, emphasising the need for reciprocal reforms and confidence-building.
The authors would like to express their sincere gratitude to Sarthak Pradhan and Ameya Naik for their valuable feedback.
Drawing comparative insights from the Common Monetary Area, the paper argues that successful rupee regionalisation is both a necessary step for deeper regional integration and a precursor to the INR’s internationalisation. It calls for India and its neighbours to co-develop credible, rules-based mechanisms that enable inclusive and stable regional monetary cooperation.
1. Introduction
Regional economic integration has increasingly moved beyond the reduction of tariff barriers into domains of monetary cooperation, currency alignment, and shared financial infrastructure. Within this spectrum, the regionalisation of a national currency represents a potent yet underexplored form of integration in the Indian subcontinent.
For India, whose currency already enjoys partial acceptance in neighbouring economies such as Nepal and Bhutan, expanding the role of the rupee regionally is both an economic opportunity and a strategic tool for advancing its regional influence.
The global experience demonstrates that regional currency arrangements – whether in the form of formal currency unions (e.g., the eurozone), fixed exchange area systems (e.g., the CFA franc zones in Africa), or partial dollarisation (as seen in parts of Latin America and the Caribbean) – can significantly reduce transaction costs and deepen regional trade and investment flows. 1, 2, 3
In the Indian subcontinent, despite geographic proximity, dense cultural linkages, and growing bilateral trade volumes, cross-border transactions are still heavily reliant on third-country currencies, primarily the US dollar. This reliance introduces unnecessary conversion costs, exposes economies to exchange rate volatility, and erodes the region’s financial independence.
Several structural factors make the case for rupee regionalisation compelling. First, India is the region’s largest trading partner and a critical source of imports, investment, and tourism for its neighbours. Second, recent currency crises in Sri Lanka and persistent foreign exchange constraints in the Maldives and Nepal highlight the vulnerability of smaller economies to external shocks. Third, India’s own policy trajectory, articulated through the Reserve Bank of India’s gradual moves to internationalise the rupee, aligns with the broader objective of creating an alternative settlement mechanism that complements, rather than replaces, existing multilateral frameworks.
This paper argues that regionalising the rupee in the Indian subcontinent can deliver economic efficiencies, strengthen regional value chains, and consolidate India’s role as an economic anchor. It examines the economic rationale, potential impact, institutional requirements, and political economy considerations that would shape such an initiative. In doing so, it aims to place deepening financial linkages in the neighbourhood as part of a wider regional integration strategy.
2. The Context and Rationale
The conceptual bedrock for assessing monetary integration lies in the concept of Optimum Currency Area (OCA), first proposed by Robert Mundell (1961). Mundell argues that a common currency area can be efficient if member regions exhibit sufficient factor mobility and price and wage flexibility.4 Subsequent contributions by McKinnon (1963) and Kenen (1969) refined the criteria, emphasising capital mobility and economic diversification as additional determinants. 5 The concept of currency regionalisation refers to the expansion of a national currency’s use beyond its issuing country’s borders, either as a means of payment, unit of account, or store of value . It is distinct from currency internationalisation, which targets global use, and from a currency union, which entails shared monetary sovereignty among members .
The Indian subcontinent meets some, but not all, of these conditions. Intra-regional trade patterns remain highly asymmetrical, with India serving as the dominant hub. Nonetheless, financial and infrastructural linkages are growing, and existing pegged arrangements demonstrate a degree of monetary compatibility.
Unlike a currency union, regionalisation does not require the surrender of full monetary sovereignty. Instead, it enables partner economies to gain from reduced transaction costs and enhanced financial integration, while retaining their own central banks and policy frameworks.
Economic literature also highlights the self-reinforcing nature of currency adoption, i.e. network externalities. As more actors accept a currency for transactions, its utility rises, encouraging further uptake (Krugman, 1980), Matsuyama et al., 1993).6, 7 For the Indian rupee, this implies that initial adoption in trade settlements and tourism can create momentum toward broader regional acceptance .
2.1 The Dollar’s Growing Unreliability
In recent years, confidence in the U.S. dollar’s once-unquestioned supremacy has been eroding. A series of geopolitical and economic events has exposed vulnerabilities in the dollar-centric global system, prompting many countries to seek alternatives. For India, this has sharpened the case for promoting the Indian rupee as a settlement and invoicing currency in the region.
What are the factors that have led to recent moves towards de-dollarisation?
First, the dollar’s dominance gives the U.S. outsized power to impose financial sanctions. In practice, access to dollars and dollar-based payment networks (like SWIFT) can be turned off for targeted nations or entities. This was evident when Western governments froze more than $300 billion of Russia’s reserves and cut off Russian banks from SWIFT in 2022, a move widely described as the weaponisation of the dollar.8 Such uses of the dollar as a geopolitical weapon have made other nations wary of being too dollar-dependent.
Second, the U.S. Federal Reserve’s monetary policy has global ripple effects. When U.S. interest rates rise sharply, the dollar tends to strengthen, and dollar liquidity often tightens worldwide, with painful consequences for developing economies.9 Historically, Fed rate hikes have triggered capital outflows, currency depreciation, and even financial crises in emerging markets. For example, in 2022–2023, rapid rate hikes made U.S. assets more attractive, spurring capital flight from emerging markets and weakening their currencies. Previously, the taper tantrum episode in 2012-13 led to an emerging markets currency crisis.
Thirdly, using the U.S. dollar in international transactions effectively pulls one into the U.S. legal and regulatory orbit. Because so much trade and finance is dollar-denominated, even banks and businesses with no physical U.S. presence must comply with U.S. regulations whenever they use dollars. This exposes foreign institutions to complex compliance burdens and the risk of punitive action by U.S. authorities. In a way, dollar transactions extend U.S. jurisdiction globally, creating financial extraterritoriality.10 The long-arm reach of U.S. oversight adds a layer of uncertainty, prompting countries to seek more autonomy from the dollar-based system.
Finally, the dollar still comprises the largest share of global foreign exchange reserves, but this very dominance poses a concentration risk. Heavy dependence on a single currency means that a shock to that currency, whether loss of value, loss of access, or policy unpredictability, can undermine countries’ reserve holdings. In fact, central banks worldwide increasingly view excessive dollar holdings as a risk, especially in light of sanctions, trade tensions, and U.S. policy swings. This has led to gradual reserve diversification by adding euros, yen, gold, and yuan. The dollar’s share of official FX reserves has fallen from 70% in 2000 to around 57% by 2024, indicating that a dollar-centric reserve model is seen as less safe than before.11
Here, it is important to note that countries have shown interest in using the Chinese Renminbi (RMB) as an alternative to the U.S. dollar amid shortages and sanctions pressure.In 2023, Bangladeshagreed to pay Russia in yuan for a major nuclear power project after payment in Rubles proved unfeasible.12
China’s expanding economic footprint helps the RMB to gain ground. Firstly, China is one of the largest trading partners for Bangladesh, Sri Lanka and the Maldives. Secondly, Chinese investments under the Belt and Road Initiative have increased financial and infrastructural dependency for neighbouring nations. Finally, the Cross-Border Interbank Payment System (CIPS) offers an alternative to SWIFT and facilitates yuan-denominated trade and finance. In 2025, a group of six financial institutions from South Africa, the UAE, Singapore, and Kyrgyzstan officially joined CIPS as direct participants.13
The countries drifting towards the RMB must be aware of its risks and constraints. The yuan remains tightly managed by the People’s Bank of China and is not freely convertible. Moreover, the Chinese government’s finances often have hidden conditionalities, and its financial system lacks legal recourse mechanisms, undermining trust. Therefore, India must act decisively to build an inclusive INR-based ecosystem before the regional drift toward China becomes more entrenched.
2.2 India’s Role in Regional Trade
India’s position as the region’s largest economy and principal trading partner for most neighbours creates both the opportunity and the rationale for exploring the rupee’s regional role.
Table 1: India’s Role in Regional Trade 14 (Ministry of Commerce)
| Partner Economy | Bilateral Trade with India (2023–24) | India’s Share in Partners’ Total Trade | Key Imports from India | Key Exports to India |
|---|---|---|---|---|
| Bangladesh | US$12.9 billion | 12-13% | Cotton, cereals, machinery | Ready-made garments, jute |
| Sri Lanka | US$5.5 billion | 22% | Petroleum products, food, and pharmaceuticals | Tea, rubber, spices |
| Nepal | US$7.8 billion | 63% | Fuel, machinery, cereals | Cardamom, textiles |
| Bhutan | US$1.3 billion | 80% | Petroleum, machinery, vehicles | Hydropower |
| Maldives | US$0.9 billion | 14% | Food, construction materials | Fish, tourism services |
3. What are the existing arrangements?
Several economies already have operational or informal ties to the Indian rupee:
● Nepal: The Nepalese rupee is pegged to the INR at a fixed rate (NRs 1.6 = INR 1), with unrestricted acceptance in border trade and formal banking channels.
● Bhutan: The Bhutanese ngultrum is pegged at par with the INR; the rupee is legal tender and widely used domestically for large transactions.
● Sri Lanka: In 2022, the Central Bank of Sri Lanka authorised INR as a designated foreign currency.15 The rupee is also increasingly accepted in the tourism sector.
● Maldives: INR is informally used in resorts and high-end tourism payments, especially for Indian travellers, though not yet formalised in banking systems.
● Bangladesh: Discussions have been underway to allow partial trade settlement in INR, starting with high-value goods such as cotton and petroleum.16
The RBI has put in place an arrangement allowing transactions in the currencies of multiple countries to promote global trade growth (with emphasis on exports from India) and to support the increasing interest of the global trading community in INR. These countries include Myanmar, Sri Lanka, Bangladesh and the Maldives, among others. The Ministry of Finance is engaged with the Indian trading community to simplify the administrative procedures to implement this mechanism.17
Several partner economies face chronic foreign exchange constraints, which heighten the attractiveness of using INR. Sri Lanka’s 2022 sovereign debt crisis led to severe shortages of USD liquidity, prompting the search for alternative settlement currencies.18 Maldives regularly experiences balance-of-payments pressure due to high import dependence and tourism seasonality. 19 Nepal and Bhutan benefit from stable rupee pegs, insulating them from USD volatility but limiting monetary policy flexibility . Bangladesh’s dollar reserves fell sharply in 2022–23 due to rising import bills and global commodity price shocks .20 For such economies, rupee regionalisation could reduce USD demand, ease liquidity pressures, and stabilise trade flow s.
For instance, Bangladesh imported $11.06 billion worth of goods from India (13% of its total import bill), and Sri Lanka imported $4.1 billion worth (22% of its total import bill) in 2023-24. Their respective forex reserves are $32.3 billion and $6.2 billion.21 Paying for these goods using INR would significantly ease the demand pressure on dollars. Bangladesh and Sri Lanka currently export goods worth $1.8 billion and $1.4 billion, respectively, to India, through which they could earn rupees for trade settlement.
4. What are the Institutional Requirements?
The successful adoption of rupee regionalisation in the Indian subcontinent will hinge on establishing a strong institutional and operational foundation. While the macroeconomic rationale for INR settlement is compelling, its practical implementation requires targeted reforms across the monetary, regulatory, and payment system domains.
From a technical standpoint, bilateral currency swap agreements and progress toward convertibility of the rupee constitute necessary conditions. These ensure liquidity in cross-border settlements and give foreign central banks and financial institutions confidence that rupee holdings can be readily accessed and exchanged. Without these mechanisms, countries will remain reluctant to accumulate INR balances in any significant sense.
The economic enablers of the strategy are a Free Trade Area and cross-border payment integration, both of which represent sufficient conditions. An FTA expands trade volumes and creates the density needed for the rupee to become a natural medium of exchange. Simultaneously, seamless payment connectivity through interoperable financial systems and digital public infrastructure strengthens incentives for businesses and consumers to use INR.
The following section explores these four institutional pillars in depth, analysing their individual functions and interdependencies in shaping a successful rupee regionalisation strategy.
4.1. Establishing a Free Trade Area
Higher trade integration strengthens the case for denominating settlements in a common currency, as seen in ASEAN, where trade liberalisation under the ASEAN Free Trade Area (AFTA) has complemented regional payment connectivity initiatives.22 In this sense, an FTA serves as both an economic driver and a policy anchor for monetary cooperation, ensuring that the benefits of rupee settlement are amplified through greater market access and reduced trade friction.
The Indian subcontinent hosts a population of over 1.6 billion people, diverse natural and human capital, and intricate cultural-historical linkages. Despite this, intra-regional trade remains disproportionately low, accounting for less than 6% of total trade in the region. The absence of a comprehensive and inclusive Free Trade Area hinders the realisation of economic complementarities and regional prosperity.
This underperformance contrasts with an estimated potential of at least $67 billion in internal trade, indicating substantial unrealised trade opportunities.23 By comparison, even Southeast Asia, Latin America and Africa have higher intra-regional trade shares.
The 10-member ASEAN bloc achieves a higher, though still moderate, level of internal trade. Intra-ASEAN trade constitutes roughly 22–25% of ASEAN’s total merchandise trade in recent years and remains the bloc’s largest export market by destination.24 Intra-Mercosur trade is estimated at around 10–15% of the bloc’s total trade. 25 Similarly, Africa’s intra-regional trade under the new African Continental Free Trade Area (AfCFTA) increased from 13.6% in 2022 to 14.9% in 2023, despite global economic challenges .26 Hence, high tariffs, poor connectivity, and political frictions have kept South Asia the least integrated trading region in the worl d.
The Southern Common Market (MERCOSUR) is a trade bloc comprising of Argentina, Brazil, Paraguay, and Uruguay. Despite political and economic heterogeneity, MERCOSUR successfully eliminated most intra-bloc tariffs and promoted the use of local currencies for trade settlements. A noteworthy innovation is the Sistema de Pagamentos em Moeda Local (SML), a settlement system between Brazil and Argentina that allows exporters and importers to invoice and settle payments in their respective national currencies, making life easier for small producers.
While earlier frameworks such as SAFTA (South Asian Free Trade Area) aimed to foster trade integration, they have failed due to political bottlenecks, especially involving Pakistan.27 Excluding Pakistan from future trade initiatives provides an opportunity to bypass the political challenges and design a functional, sector-specific, and free trade area within the Indian subcontinent.
By eliminating tariffs and reducing non-tariff barriers on intra-regional trade, an FTA would expand trade volumes, creating the transactional depth for sustained INR usage. If countries in the Indian subcontinent remove tariffs and non-tariff barriers, then trade among them will increase because goods would become cheaper, supply chains would become easier, and firms would be incentivised to trade more frequently. When trade increases, the number and value of cross-border transactions also rise. If enough transactions happen regularly, businesses and banks gain confidence in using the INR as a settlement or invoicing currency. This accumulation of repeated, high-volume trade is what creates transactional depth.
4.2. Bilateral Currency Swap Agreements
The ability of partner economies to access INR liquidity when required is an important prerequisite. Bilateral currency swap agreements between the Reserve Bank of India (RBI) and the central banks of participating economies can provide this liquidity directly, bypassing the need for conversions via third-country currencies such as the US dollar. These agreements should define the maximum drawdown limits, tenure, and repayment mechanisms, while including provisions for automatic activation during episodes of market stress.
India currently maintains bilateral currency swap arrangements with most of its neighbours under the SAARC Currency Swap Framework. However, these are often underutilized, short-term, and largely limited to crisis liquidity support, with minimal impact on long-term trade or investment integration.
By stabilising exchange rates and ensuring uninterrupted access to INR, swap lines would strengthen trader and investor confidence, particularly during periods of currency volatility or external financial shocks. Precedents such as the Chiang Mai Initiative in East Asia demonstrate the stabilising effect of such arrangements when coupled with macroeconomic surveillance and coordinated policy responses.28
4.3. Cross-Border Payment Integration
The operational backbone of INR settlement is an efficient, secure, and interoperable cross-border payment system. Integration of India’s Unified Payments Interface (UPI) with the domestic payment systems of partner countries would allow for instant settlement of small-value transactions, particularly in tourism, remittances, and SME trade. For high-value transactions, real-time gross settlement (RTGS) linkages between central banks would be necessary to facilitate same-day interbank transfers without reliance on correspondent banking chains. Such integration would require harmonisation of technical standards, encryption protocols, and cybersecurity measures to maintain trust and prevent operational disruptions.
UPI processes over 10 billion monthly transactions domestically and has been linked with systems in Nepal, Singapore, the UAE, and Bhutan.29 RBI’s recent International Trade Settlement in the INR framework (July 2022) provides the legal basis for invoicing and settlement in rupees. 30 These capabilities offer ready-made platforms for scaling INR use in regional trade without the need for an entirely new monetary architecture .
4.4. Full Capital and Current Account Convertibility
While current account convertibility is already operational for most trade and service transactions in the region, the broader use of the rupee in investment flows will require capital account convertibility. Under the Foreign Exchange Management Act (FEMA), current account transactions are permitted unless expressly prohibited, while capital account transactions are prohibited unless specifically permitted. This means that the Indian rupee can be freely exchanged for trade in goods, services, remittances, and other current account transactions, but restrictions remain for capital/investment flows.
India’s neighbouring countries exhibit diverse regulatory regimes regarding currency convertibility. While current account convertibility is in place across the region, capital account convertibility remains partial and highly restrictive. Importantly, unlike the current account, capital account openness varies along a spectrum. While some nations allow inward FDI and limited outflows, true convertibility entails a rules-based system enabling portfolio flows, foreign borrowing, and cross-border equity investments. At present, the region falls on the conservative end of this scale.
According to the IMF, there are multiple criteria that is used to judge the relative openness of the capital account. These are as follows: Repatriation requirement, Controls on capital and money market instruments, Controls on derivatives, controls on credit operations, controls on direct investment (FDI), Controls on liquidation of direct investment, controls on real estate transactions, controls on personal capital transactions, and other provisions to specific to the financial sector.
For meaningful rupee regionalisation, India would need to gradually liberalise its capital account. Indian investors and businesses must be able to move capital into neighbouring markets seamlessly. Similarly, if other countries wish to attract Indian capital and benefit from currency and trade integration, they need greater capital account convertibility. Without this reciprocal openness, asymmetries will persist, undermining confidence in a shared rupee zone.
In the early phases, capital account liberalisation could be limited to long-term, non-volatile flows like FDI and rupee-denominated bond issuance. Over time, as financial systems mature and risk management frameworks strengthen, this could be expanded to cover a broader range of capital market transactions. A gradual approach would protect partner economies from the destabilising effects of sudden capital inflows or outflows, while still allowing the rupee to serve as a viable investment and financing currency.
5. Comparative Experiences
Across regions, national or external currencies have been adopted, partially or fully, by neighbouring economies to facilitate trade, stabilise exchange rates, or anchor macroeconomic credibility. The following cases illustrate different models, governance arrangements, and outcomes that can inform the Indian subcontinent’s approach to both regionalisation and the creation of a free trade area.
● South African Rand Common Monetary Area (CMA): The CMA is the closest parallel for a rupee-centred arrangement in the Indian subcontinent. A dominant economy (South Africa/India) anchors the monetary system. Smaller economies maintain national currencies but rely on the anchor for settlement and trade. Institutionalised arrangements preserve sovereignty while securing stability benefits.31
● The ASEAN Free Trade Area: AFTA increased the intra-regional trade share from 19% (1993) to around 25% (2020) through progressive tariff elimination and trade facilitation measures.32
● The European Free Trade Association: The EFTA, though small in scale, has shown that even geographically dispersed economies can boost mutual trade and investment flows through regulatory alignment and tariff removal.33
5.1. Case Study: Common Monetary Area in Southern Africa (CMA)
Upon formalisation on April 1, 1986, the Common Monetary Area (CMA) anchored Lesotho, Swaziland, and later Namibia to the South African rand. Initially, the arrangement stemmed from the Rand Monetary Area (RMA) established in December 1974, which the CMA replaced and institutionalised.34 The following table compares key macroeconomic indicators for the Common Monetary Area members before and after its establishment in April 1986. It highlights changes in inflation alignment, currency stability, trade integration, and reserve adequacy to understand the various economic dimensions of the arrangement’s impact. 35
Table 2: Macroeconomic and Trade Indicators in the Common Monetary Area
| Indicator | Before CMA (pre-1986) | After CMA (post-1986) |
|---|---|---|
| Inflation Convergence | Inflation rates in Lesotho, Swaziland, and Namibia diverged more from South Africa’s, reflecting domestic monetary differences. | CPI trends converged toward South Africa’s levels; deviations narrowed, aligning with SARB’s 3–6 % target range. |
| Exchange Rate Stability | Rand informally circulated; local currencies occasionally traded at small, unofficial discounts; no formal legal peg. | Peg to the rand at 1:1 parity formalised; negligible deviations; higher FX stability and credibility. |
| Intra-CMA Trade Share | Trade with South Africa was significant, but settlement systems were fragmented; the intra-CMA trade share was volatile and often below potential. | Settlement streamlined under CMA; intra-CMA trade shares for smaller members rose modestly (e.g., Lesotho & Eswatini gains), with reduced FX friction. |
| Reserve Adequacy | Lower reserves in months of import cover; vulnerability to external shocks heightened by currency risk. | Improved reserve adequacy (months of import cover) in smaller members; rand usage reduced the need for large FX buffers against SA trade. |
The CMA provides a rare, long-running example of a regional arrangement in which one dominant economy sustains parity relationships with smaller neighbours while allowing them to retain formal monetary sovereignty.36 This comparison allows for an assessment of the CMA’s contribution to price stability, currency credibility, trade facilitation, and external resilience among its smaller member states. 37 For India, adapting these principles to its own geopolitical and economic context could make the rupee a practical regional settlement and anchor currency .
While the CMA has succeeded in maintaining monetary stability and exchange rate credibility across southern Africa, it has fallen short of fostering deep economic integration among its members. Despite its shortcomings, the CMA offers a valuable institutional precedent. India can learn from the CMA’s institutional asymmetry by designing consultative mechanisms and shared governance frameworks that ensure smaller partners’ participation, something the CMA struggled to achieve. Therefore, the example should not be viewed only as a template for replication, but as a case that highlights challenges that India must avoid in its path towards regionalisation of the rupee.
6. Potential Economic Impact of a Free Trade Area
A Free Trade Area among India, Bangladesh, Nepal, Bhutan, Sri Lanka, and the Maldives would aim to eliminate most tariffs and reduce non-tariff barriers on goods and services traded within the region. This would go beyond currency settlement reform by addressing structural trade frictions, creating opportunities for trade expansion, investment, and supply chain integration.38, 39
India has long viewed its neighbours through the lens of security or aid. Today, it has a population of 1.43 billion, a GDP of around USD 3.7 trillion, and household consumption of roughly USD 2.2 trillion. Adding its neighbours to this weight means an additional 226 million people, USD 600 billion in GDP, and nearly half a trillion dollars in annual consumption. Thus, India’s effective economic space expands by about 16% in both population and GDP.
Table 3: Demographic and Macroeconomic Indicators40(World Bank Open Data)
| Country | Population (2024) | GDP (USD) | Per Capita Income (USD) | Purchasing Power Parity (USD) Per Capita |
|---|---|---|---|---|
| India | 1,428 million | 3,912.7 billion | 2,696.7 | 11,159 |
| Bangladesh | 173.6 million | 450.12 billion | 2,593.4 | 9,646.8 |
| Sri Lanka | 21.9 million | 98.96 billion | 4,515.6 | 15,000 |
| Bhutan | 0.79 million | 3.02 billion | 3,839.4 | 16,254.0 |
| Nepal | 29.65 million | 42.91 billion | 1,447.3 | 5,736.6 |
| Maldives | 0.53 million | 6.98 billion | 13,215.5 | 26,542.7 |
This prospect is even more attractive because several of these neighbours are richer per person than India. Sri Lanka’s per capita income is about USD 4,500, Bhutan’s is nearly USD 3,800, and the Maldives towers above the region at over USD 13,000, five times higher than India.
Even Bangladesh, long considered a low-income country, now sits on par with India in nominal per capita terms, with a rapidly expanding urban middle class. On a purchasing-power basis, these countries look even stronger. Maldives’ PPP per capita income reaches OECD levels, Bhutan’s exceeds India’s by a wide margin, and Sri Lanka too remains ahead of Indian levels.
This enhanced scale would make the region a far more formidable player in global trade and a prime destination for foreign direct investment. International corporations would be more inclined to invest in a large, integrated market, establishing regional supply chains that would benefit all member nations. For the other countries, having access to a large market such as India should be attractive, as other trade opportunities in the world are shrinking.
6.1 Macroeconomic and sectoral implications
Export-oriented sectors like processed food, pharmaceuticals, and light manufacturing would benefit from preferential access to nearby markets. Reduced trade barriers would enable competitive pricing and faster market penetration. For consumers, the elimination of tariffs and associated trade frictions would translate into lower prices, greater product variety, and improved quality standards.
At the production level, the removal of trade barriers could catalyse the development of regional value chains. In textiles, for instance, India’s manufacturing capacity could integrate more closely with Bangladesh’s garment sector, creating a competitive regional cluster. Hydropower linkages between Bhutan and India could be expanded to address energy needs in the wider bloc, while coordinated tourism initiatives linking Sri Lanka, the Maldives, and India could attract multi-destination travellers, enhancing the tourism industry’s resilience and diversity.
Furthermore, the certainty provided by an enlarged, harmonised market could serve as a powerful stimulus for foreign direct investment, as investors would gain access to multiple economies under a unified market framework.41
Beyond rupee regionalisation, India will also need to think like a regional transport hub. Just as Frankfurt functions as an interchange for much of continental Europe, India could position selected cities as multimodal gateways for the subcontinent. Siliguri, anchored by Bagdogra airport, already acts as a logistical hinge between the eastern Himalayas and the Bay of Bengal. With planned terminal expansion and rising cargo volumes, it could evolve into a de facto aviation and cargo hub for Nepal, Bhutan and parts of Bangladesh, especially if paired with simplified visa regimes, dedicated cargo corridors, and integrated customs facilities.
A similar logic applies in the south. Indian airports such as Chennai, Kochi, Thiruvananthapuram, Bengaluru and Hyderabad already handle dense traffic to Colombo and Malé; new direct routes (for instance, the forthcoming Thiruvananthapuram–Malé service) further deepen this network. With coordinated scheduling and harmonised security and ground-handling standards, these airports could operate as the primary interchange points for Sri Lankan and Maldivian traffic into the broader Indo-Pacific, much as Gulf hubs intermediate between South Asia, Europe, and Africa.
Physical connectivity on land and at sea is an equally important complement. India’s long-standing road-building role in Bhutan through Project DANTAK, and recent investments in new strategic roads there, show how cross-border highways can lock in economic as well as political interdependence.
6.2 Spillovers
If rupee regionalisation and an eventual free trade area reduce frictions in the movement of goods, payments, and capital, the resulting spillovers will be strongest in services, which already account for a significant share of India’s GDP and are highly competitive across the region. Services trade, unlike goods, relies heavily on financial connectivity and mobility of professionals, both of which would be greatly strengthened by regional currency usage.
Banks can offer INR-denominated trade finance, reducing credit risk for regional SMEs and lowering the cost of capital for cross-border trade. Indian fintech firms such as PhonePe, Razorpay, Paytm, and BharatPe could gain a first-mover advantage in digital public infrastructure across the region. Existing UPI links with Singapore, UAE, and Nepal show a clear pathway for scale-up. In the subcontinent, this can become the backbone of low-cost retail payments, remittances, and merchant transactions.
With regards to educational services, there is a high demand for Indian university education in Nepal, Bhutan, Bangladesh, and Sri Lanka, which leads to thousands of students migrating annually for engineering, medicine, and management programmes. Indian institutions could set up branch campuses in neighbouring countries with joint degrees, twinning programmes, and regional research centres.
Enhanced intra-regional trade and production networks would strengthen geoeconomic resilience by reducing dependence on extra-regional suppliers for essential goods, thereby improving supply security during global disruptions.42 Moreover, deeper economic interdependence would have a reinforcing effect on political cooperation mechanisms, providing diplomatic dividends through greater trust, stability, and policy alignment among participating states.
7. Potential Drawbacks and Considerations
While rupee regionalisation presents several strategic and economic advantages, it also raises valid concerns for neighbouring countries, particularly in terms of asymmetric dependence and macro-financial exposure. These concerns must be acknowledged in any balanced policy design.
● First, there will be a loss of monetary sovereignty. Just as in the case of the USD, reliance on the INR could diminish the ability of countries to manage exchange rates, reserves, and liquidity according to national priorities. This also creates a potential concentration risk, whereby economic and financial shocks emanating from India could be transmitted across borders.
● While one of the critiques of dollar dependence is the lack of alignment between U.S. monetary policy and the needs of developing countries, the same challenge would exist here. The Reserve Bank of India has a domestic mandate focused on managing India’s inflation. If the RBI pursues a policy of rupee depreciation to boost Indian exports, regional partners who hold INR reserves will suffer a decline in purchasing power. Their foreign exchange reserves will effectively lose external value, undermining import capacity and macroeconomic stability.
● Thirdly, adopting the Indian rupee implies tying a portion of a country’s economic destiny to India’s domestic policies and political stability. Changes in government could bring a reversal of current agreements and fluctuations in priorities that affect the terms and goodwill underpinning such cooperation. For example, the 2015 unofficial blockade of Nepal severely disrupted essential supplies and reinforced concerns that economic ties with India are not merely commercial, but also deeply political.43
● Further, political changes can lead to abrupt policy shifts. For example, during India’s 2016 demonetisation, Nepali banks and citizens were left with billions of rupees in unusable Indian currency.44 The episode strained bilateral ties and triggered popular backlash against pro-India factions in Nepal’s politics, with lasting consequences on trust.
8. Conclusion
For India and its partners, rupee regionalisation offers several key benefits in the current environment:
● Shielding trade from sanctions and external politics
● Reducing exposure to dollar liquidity crunches
● Avoiding extraterritorial compliance burdens
● Diversifying reserve holdings and foreign exchange risks
● Strengthening regional integration and economic leadership
It offers a combination of economic, strategic, and institutional benefits. Economically, it promises to reduce transaction costs, minimise currency conversion risks, and improve liquidity resilience during external shocks. Strategically, it strengthens regional economic sovereignty, decreases dependence on third-country currencies such as the US dollar, and enhances the collective bargaining position of participating economies in global trade and financial negotiations. Institutionally, it can catalyse deeper cooperation in payment systems, regulatory harmonisation, and monetary coordination, thereby laying the groundwork for broader economic integration.
Crucially, successful regionalisation of the rupee could also serve as the foundation for its eventual internationalisation, enabling the INR to function not just as a regional currency, but as a credible medium of exchange, store of value, and reserve asset in wider emerging market networks.
Footnotes
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