India Nepal Currency Agreement

April 10th, 2021

India Nepal Currency Agreement

Since the creation of Nepal`s rastra Bank`s central bank in 1956, it has begun work to make the Nepalese rupee the only legal means of payment and is trying to eliminate Nepal`s existing dual currency system. As a result, the dual currency system was abolished under Nepal`s 1957 Traffic and Expansion Act. A new single monetary system was put in place, after which Nepal`s Rastra Bank maintained the Nepalese Rube to the Indian Rube and set the exchange rate at 160 Nepalese rupees for 100 Indian rupees. Such a provision implied that Nepal`s Rastra Bank could buy and sell a large number of Indian rupees at the given exchange rate. As a result, many exchange switches have been opened in different parts of the country to provide this service. In addition, Nepalese banks have been allowed to facilitate the exchange of these currencies at the fixed exchange rate. The Indian government`s reluctance to exchange banned notes from Nepal is more related to Indian domestic policy than anything else. It should be noted that India was first prepared to provide Nepal with an opportunity to exchange its prohibited tickets. In March 2017, a high-level delegation from the Reserve Bank of India (RBI) travelled to Kathmandu to discuss the exchanges with Nepalese colleagues.

In March 2018, then-Finance Minister Arun Jaitley assured Nepal that it would soon be able to exchange opportunities for Indian disassembled notes. However, India ended the possibility of exchanging banned Indian banknotes in Nepal when the RBI released its 2017-2018 annual report last August and withdrew part of its 2016-2017 report that said banned Indian notes had not yet been returned to Nepal. The reason the Indian government has changed its mind is in the same RBI 2017-18 report. The report indicates that 99.3 per cent of demonetized banknotes have returned to the formal banking system, indicating that almost all of the money has returned and that demonization has virtually failed to freeze dirty money. If India had withdrawn its banned currency from Nepal, the total amount of repatriation would have been even higher, further revealing the government`s assertions that demonization was essential to hit dirty money. With India`s parliamentary elections just a few months away, it was easier for the administration to mislead its weak neighbour than to exchange currencies that would continue to demonstrate the failure of its policy. Following the ban, traders and residents of markets along the Nepal-India border had criticized the government`s decision to ban the use of 200, 500 and 2,000 rupee Indian banknotes in the country. They said the ban would have a negative impact on trade in goods and services between the two neighbouring countries. Almost all market towns along the border used Indian currency for payment. Should the Nepalese currency introduce a floating exchange rate? Or should the Nepalese currency be linked to another currency and other related issues? These are important and serious issues that require serious consideration and analysis.

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