In late 2016, Narendra Modi, the prime minister of India, unexpectedly announced that his government was demonetising all Indian currency notes of Rs 500 and Rs 1,000. These notes were to be exchanged for newly minted notes. Not only did the move shock India, it also caught its neighbours off guard—especially Bhutan and Nepal, where the use of Indian currency is allowed.
Bhisma Raj Dhungana, the director of the foreign-exchange management department of Nepal Rashtra Bank—the country’s central bank—told me that the new notes in the Indian market were circulated in Nepal as well. But the Indian government did not authorise the exchange of demonetised notes in Nepal with new ones. “India did not officially inform us if we can allow the circulation of these notes,” Dhungana said. According to media reports, after demonetisation, Nepal ended up with invalid Indian notes estimated to be worth Rs 950 crore—or $146 million—as of April 2018. Dhungana said that the NRB still holds demonetised notes worth Rs 6 crore.
On 20 January this year, the NRB banned the circulation of Indian currency notes of Rs 200, Rs 500 and Rs 2,000 in the country. While the central bank’s cache of invalid Indian currency seems to be the main reason behind the NRB’s move, India’s history of taking actions that leave Nepal’s economy in a limbo may also be a contributing factor.
Indian currency has time and again been outlawed in Nepal. In the early 2000s, Indian notes of Rs 500 and Rs 1,000 were banned in the country. The fear that counterfeit high-value Indian notes were circulating in the Nepali economy played into the ban; India has often claimed that counterfeit currency enters its territory via Nepal. In 2015, Nepal removed the ban and the Reserve Bank of India, the Indian central bank, permitted people to carry Indian notes of Rs 500 and Rs1,000 to Nepal, subject to a limit of Rs 25,000.