India and Nepal share deep economic interlinkages in trade, remittances, tourism, and connectivity. The RBI’s October 2025 reforms permitting Indian banks to lend in INR to Nepalese entities aim to enhance cross-border investment and reduce currency volatility, strengthening Nepal’s financial stability. However, political instability, trade imbalances, infrastructure gaps, and geopolitical competition continue to challenge bilateral growth. Strengthened strategic and economic cooperation is crucial to harnessing mutual potential and advancing regional integration.

RBI’s 2025 Reforms Aimed at Strengthening India–Nepal Economic Cooperation

• INR Lending to Non-Residents: Authorised Dealer (AD) Banks in India are now permitted to lend Indian Rupees (INR) to non-resident entities in Nepal, Bhutan, and Sri Lanka for legitimate cross-border transactions.
• This measure is expected to ease trade financing, reduce dependency on foreign currencies, and improve liquidity for Nepalese businesses engaged in trade with Indian firms.
• It also strengthens the use of INR as a regional trade currency, enhancing monetary cooperation in South Asia.
• Expanded Use of Special Rupee Vostro Accounts (SRVAs): The RBI has allowed Special Rupee Vostro Accounts to be used for investments in corporate bonds and commercial papers, in addition to central government securities.
• This provides foreign banks and financial institutions in Nepal with broader investment options within India.
• It promotes capital market linkages and enhances financial interdependence between the two countries.
• Transparent Currency Reference Rates: RBI will now publish reference rates for currencies of India’s major trading partners, including the Nepalese Rupee.
• This aims to make INR-based trade more transparent, reliable, and predictable, reducing currency volatility in bilateral transactions.
• It improves price discovery and confidence among traders and investors in both countries.

Major Factors that have Shaped India–Nepal Relations Over Time

• Historical and Civilizational Foundations: The foundation of India–Nepal relations lies in deep civilizational and religious bonds. 
• The two nations share a 1,751 km open border and intertwined cultural roots through Hinduism and Buddhism. 
• Sacred sites such as Pashupatinath Temple (Kathmandu) and Lumbini (birthplace of the Buddha) serve as spiritual bridges connecting their people.
• The India-Nepal Treaty of Peace and Friendship (1950), completing 75 years in 2025, has been the cornerstone of bilateral relations, shaping cultural, economic, and strategic cooperation between the two nations—often described as the “Roti-Beti Ka Rishta”, symbolising deep people-to-people and familial ties.
• Over 8 million Nepalis live and work in India, contributing significantly to Nepal’s remittance economy, while 32,000 Nepali soldiers serve in the Indian Gorkha regiments, symbolising military and emotional trust. 
• This people-to-people interdependence has ensured that political fluctuations seldom undermine the enduring social fabric between the two nations.
• Economic Interdependence: India is Nepal’s largest trade and investment partner, providing transit for nearly all of Nepal’s third-country trade. 
  • Major Indian exports include petroleum, iron & steel, automobiles, machinery, and cereals. The open border and connectivity projects have significantly boosted bilateral trade, with Indian exports accounting for nearly 16% of Nepal’s GDP.
• India accounts for about two-thirds of Nepal’s merchandise trade, one-third of trade in services, and one-third of total FDI. 
• Nepal is India’s 14th largest export destination (2024–25), rising from the 28th position in 2014. 
• The bilateral trade framework between India and Nepal is anchored in the India–Nepal Treaty of Trade and the Agreement of Cooperation to Control Unauthorised Trade (2009), which together facilitate free trade, customs cooperation, and measures to curb illegal cross-border commerce.
• India and Nepal also share a Treaty of Transit, which grants mutual transit rights through each other’s territory via designated routes and modalities, facilitating smoother cross-border trade and connectivity.
• Energy and Hydropower Cooperation: Energy cooperation forms a strategic pillar of mutual interdependence. 
• Nepal possesses an estimated hydropower potential of 40,000 MW, while India faces rising electricity demand. 
• India and Nepal have signed a long-term power trade agreement to export 10,000 MW of electricity from Nepal to India over the next decade, marking a major step in energy cooperation and regional integration.
• MoUs were signed between National Hydroelectric Power Corporation (NHPC), India and Vidyut Utpadan Company Ltd, Nepal for the development of the Phukot Karnali Hydroelectric Project and the Lower Arun Hydroelectric Project, strengthening bilateral cooperation in the hydropower sector.
• This cooperation not only strengthens Nepal’s revenue base but also contributes to India’s clean energy transition, creating a win–win interdependence.
• Connectivity and Infrastructure: India’s investments in cross-border connectivity—including railways (Jayanagar–Kurtha, Jogbani–Biratnagar), highways, Integrated Check Posts (Birgunj, Bhairahawa), and petroleum pipelines—have enhanced Nepal’s access to sea routes and global trade. 
• The Motihari–Amlekhgunj Pipeline, South Asia’s first cross-border petroleum pipeline (69 km from Bihar, India to Amlekhgunj, Nepal), supplies cleaner and more affordable fuel by cutting transport costs and reducing risks of pilferage, adulteration, and supply disruptions.
• These initiatives, under India’s Neighbourhood First and Act East policies, position Nepal as a gateway between South and Central Asia.
• Strategic and Security Cooperation: Close defence and security cooperation underpins bilateral stability. 
• Joint military exercises such as Surya Kiran, intelligence sharing, and border management coordination maintain trust and ensure peace along the porous frontier.
• The reciprocal conferring of the honorary rank of General between army chiefs reflects mutual respect.
• Security interdependence is vital for combating cross-border crime, smuggling, and terrorism, enhancing overall regional stability.
• Development Partnership and Humanitarian Cooperation: India has been Nepal’s largest development partner, contributing over USD 1.5 billion since 2008 for projects in health, education, rural electrification, and water sanitation. 
  • Nepalese nationals in conflict zones have been evacuated alongside Indians under the Government of India’s missions such as ‘Operation Ajay’ and ‘Operation Ganga’, reflecting India’s commitment to regional solidarity and humanitarian cooperation.
• The Government of India (GoI) provides over 1,500 scholarships annually to Nepalese students for pursuing courses in India and Nepal across diverse academic disciplines, strengthening educational and cultural linkages between the two nations.
• India has been a longstanding partner of Nepal during emergencies and natural disasters. 
• Following the 2015 earthquake, India’s “Operation Maitri” provided immediate relief and reconstruction assistance. 
• During the COVID-19 pandemic, India supplied vaccines, oxygen, and medicines, demonstrating humanitarian interdependence in crises.

Major Challenges Affecting India–Nepal Relations Today

• Political Instability and Governance Deficits: Nepal''s political landscape experienced intense unrest in 2025, catalysed by youth-led protests against corruption, unemployment, and suppression of dissent. 
• This unrest escalated to violent clashes, the resignation of the Prime Minister, and delayed elections. 
• Such instability disrupts policy continuity, affecting India–Nepal bilateral projects and cooperation. 
• Territorial dispute and Anti-India Sentiments: The rise of nationalist narratives in Nepal has introduced diplomatic strains. 
• Particularly, the 2020 territorial dispute over Kalapani, Lipulekh, and Limpiyadhura has magnified perceptions of Indian territorial encroachment. 
• Political actors in Nepal have sometimes used anti-India rhetoric to galvanise domestic support, framing India as an obstructive external force. 
• Conversely, India perceives Nepal’s closer ties with China and review demands on longstanding treaties (e.g., the 1950 Treaty of Peace and Friendship) as challenges to its regional influence. 
• Economic and Trade Imbalance: Nepal’s persistent trade deficit with India remains a pressing challenge. 
  • The unofficial economic blockades, notably during the 2015 Nepal blockade (perceived as Indian tacit support), have caused deep resentment and strained bilateral relations.
• While India supplies over 64% of Nepal’s imports, Nepal’s exports to India constitute less than 10% of bilateral trade, making Nepal economically dependent and vulnerable. 
• This imbalance hinders Nepal’s economic sovereignty and productive capacity. 
• Furthermore, tariff and non-tariff barriers restrain Nepal’s access to Indian markets, and delays in cross-border electricity imports detract from the full potential of energy cooperation. 
• China’s Expanding Influence and Strategic Competition: Nepal’s diversification of foreign partnerships, particularly through engagement with China’s Belt and Road Initiative (BRI), has introduced a new dimension of regional competition. 
• Chinese investments, including large infrastructure projects and connectivity options, provide Nepal with alternatives to Indian-dominated trade and development links.
• This strategic realignment complicates India’s traditional hegemony in Nepal and poses concerns over security near sensitive Himalayan borders. 
• Water Resource Management and Environmental Concerns: Shared river basins create opportunities for hydropower and irrigation cooperation but also generate disputes and challenges. 
• Stalled treaties like the Mahakali Treaty and disagreements over water-sharing exacerbate bilateral tensions. 
• Additionally, climate change-induced flooding in Nepal’s Terai region, which also affects Indian border states, demands coordinated disaster management and infrastructure development. 
• Border Security and Infrastructure Gaps: The open 1,770 km India–Nepal border facilitates cultural and economic integration but also presents serious security challenges. 
  • Underinvestment, bureaucratic delays, and political instability hamper timely project completion. 
  • These bottlenecks limit Nepal’s access to international markets and constrain bilateral trade and investment flows. 
• Unregulated crossings contribute to smuggling, human trafficking, and infiltration risks.
• Terrorist organisations such as LeT, Indian Mujahideen, and Northeast insurgent groups have been exploiting the open border to facilitate their operations — including movement of trained cadres, circulation of fake Indian currency, terror financing through Nepalese banks, and smuggling of small arms, explosives, and narcotics.
• Despite several connectivity projects like cross-border railways, Integrated Check Posts, and petroleum pipelines, development gaps persist.

India’s Key Foreign Policy Initiatives

• Neighbourhood First Policy: The policy emphasises stronger physical, digital, and cultural connectivity with neighbouring countries such as Bhutan, Nepal, Sri Lanka, Maldives, Myanmar, Bangladesh, and Afghanistan. 
• It is guided by the principles of respect, dialogue, peace, and prosperity, with India’s support spanning from major infrastructure initiatives to grassroots development projects.
• Act East Policy: The Act East Policy, upgraded in 2014 from the earlier Look East Policy, broadens India’s engagement with Southeast Asia and the Indo-Pacific. 
• With ASEAN at its core, the policy promotes economic partnerships, cultural exchanges, and security cooperation.
• India has simultaneously strengthened bilateral ties and taken an active role in regional forums such as the East Asia Summit, QUAD, and ASEAN Defence Ministers Meeting Plus, reinforcing its strategic and diplomatic presence in the region.
• Security and Growth for All in the Region (SAGAR) Initiative: Launched in 2015, SAGAR aims to strengthen India’s maritime cooperation and security engagement with Indian Ocean littoral states.
• BIMSTEC and SAARC Revitalisation: India pushes for revitalising regional groupings like SAARC and promoting sub-regional cooperation through BIMSTEC with institutionalised summits and dialogues to foster structured, predictable, and sustained regional diplomacy.
• Digital Diplomacy and Connectivity: India has introduced cross-border digital payment interoperability (e.g., UPI acceptance by Nepal), shares open-source governance platforms, and promotes capacity building in cybersecurity to build tech-enabled, people-centric regional connectivity and economic integration.
• Defence and Strategic Partnerships: Initiatives like joint military exercises, capacity building in defence manufacturing under ‘Innovation for Defence Excellence (iDEX)’, and security cooperation with neighbours enhance regional stability and counter external influences.
• Development Partnership and Humanitarian Assistance: India remains the largest development partner in the region, providing credit, grants, disaster relief, vaccines, and evacuation support during crises. (e.g., 2015 Nepal earthquake aid, COVID-19 vaccine sharing, Operation Ganga). 

Strengthening Bilateral Relationship with Nepal

• Strengthen Democratic Institutions and Political Stability: India’s support for Nepal’s democratic processes, including electoral assistance and capacity building for federal governance, is crucial. 
• Given Nepal’s political instability culminating in the 2025 youth-led protests and delayed elections, India must deepen technical cooperation and continue youth diplomacy programs to nurture a stable and inclusive political landscape. 
• Helping institutionalise democratic norms will secure bilateral projects and reduce regional security risks.
• Deepen Economic Engagement Through Diversified Trade and Investment: Expanding cooperation beyond traditional sectors to include IT, tourism, and agro-processing will create employment and reduce Nepal’s economic dependence. 
• Negotiating a comprehensive Bilateral Economic Partnership Agreement (BEPA) that covers services, e-commerce, and better market access can address Nepal’s trade deficit. (NPR 237.45 billion in FY 2024–25)
• The increasing export of Nepalese hydropower, catalysed by long-term agreements like the 400 kV Dhalkebar–Muzaffarpur line, exemplifies the potential for mutually beneficial economic integration.
• Accelerate Connectivity and Infrastructure Projects: Priority should be given to operationalising cross-border railway lines such as Jayanagar–Kurtha and Jogbani–Biratnagar, upgrading Integrated Check Posts (ICPs) at Birgunj and Bhairahawa, and expanding road networks like the Terai Hulaki Highway. 
• These efforts will enhance Nepal’s access to sea routes and regional markets, linking it more firmly with India’s Act East Policy and boosting regional supply chains, trade, and tourism.
• Enhance Defence and Border Security Cooperation: The open 1,770 km border must be managed through high-tech joint patrols, biometric monitoring, and e-border posts to combat smuggling, human trafficking, and infiltration. 
• Strengthening military cooperation via joint exercises such as ‘Surya Kiran’ and expanding the recruitment and welfare services for Gurkha soldiers will reinforce trust and security under the framework of the 1950 Treaty of Peace and Friendship.
• Manage Geopolitical Competition Through Transparent and Balanced Engagements:
  India should increase grant-based development assistance and viable economic alternatives to converging Chinese BRI projects in Nepal, which currently exceed $3 billion in loans. 
• Promoting trilateral dialogue among India, Nepal, and China, while leveraging frameworks such as BIMSTEC, will help avert zero-sum rivalries and maintain regional equilibrium, ensuring the sovereignty and developmental priorities of Nepal are respected.
• Collaborate on Climate Change and Disaster Resilience: With both countries prone to climate-induced floods and earthquakes, institutionalising joint disaster response, coordinated water resource management (e.g., revisiting the Mahakali Treaty), and sustainable environmental practices will safeguard shared resources and protect vulnerable populations. 
• Ensuring rapid humanitarian assistance and capacity-building will also foster trust and regional solidarity.
• Expand Socio-Cultural and People-to-People Outreach: Strengthening soft power is essential for enduring partnerships. India should increase scholarships beyond the current 1,500 annually, enhance pilgrim circuit tourism centred on Buddhist and Hindu sites, and promote cultural festivals and language programs. 
• These initiatives help build grassroots goodwill and nurture the civilizational ties underpinning India-Nepal relations.

As the Indian Prime Minister said for the enduring India–Nepal relationship, “Given the situation throughout the world, our deepening friendship will benefit the entire humanity, and the devotion and faith of both our countries in Lord Buddha bind us in one thread, making us members of the same family.” Moving forward, India should prioritise inclusive political engagement, economic diversification, enhanced connectivity, and balanced geopolitical diplomacy to ensure mutual growth and resilience in a complex geopolitical environment.