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.
After demonetisation, the two countries discussed the exchange of demonetised notes for new ones several times—the deputy governor of NRB visited India in early 2017, and a team of RBI officials went to Nepal soon afterwards. But these meetings did not have a tangible effect—India did not issue a notification regarding the exchange of the notes.
In April 2018, shortly before the Nepali prime minister, KP Sharma Oli, visited India, he addressed his country’s parliament. “The Indian demonetisation has hurt Nepali nationals,” Oli said. “I will raise this in my meetings with Indian leaders.” While the India-Nepal joint statement regarding the visit had no mention of the issue, when Oli addressed the media upon his return to Nepal he said he asked Modi to resolve the matter. Clearly, Modi did not pay heed to his request.
Dhungana and Pradeep Kumar Gyawali, the foreign minister of Nepal, both implied that the purpose of the new prohibition is to safegu0ard the economic interests of the country, and not to counter India’s indifference towards its requests. “This is not a tit-for-tat move,” Dhungana said. Gyawali told me Nepal has to learn from India’s stance, and that “we have to be careful.”
India’s economic policies heavily influence Nepal. The exchange rate between the Indian rupee and the Nepali rupee is firmly pegged at 1:1.60, irrespective of how the Nepali economy is faring. “Currently, we are under pressure to form our monetary policy based on India’s,” Trilochan Pangeni, a former executive director of the NRB, said. “This reflects that Nepal’s monetary policy isn’t independent.”
Pangeni said that the bank had conducted a survey on the circulation of Indian currency in the country in 1965. The survey was not made public, but “the data we accessed suggested that 40 percent of the currency in Nepal’s businesses was Indian.” No such survey has been conducted since, but he said that the percentage of Indian currency in the country must have gone up.
Pangeni welcomed the ban. He felt that the circulation of Indian currency in Nepal is a symbol of India’s dominance. “It is not good for any country to allow free circulation of foreign currency in its market,” he said. Many in Nepal are happy to use Indian currency for all transactions—this sentiment is more obvious areas along the country’s long border with its southern neighbour. “A sovereign country should nurture its own currency and make its people trust it,” he said.
“Illicit trade was at its peak in 2015, during India’s alleged economic blockade,” Pangeni said. In 2015, Nepal accused India of imposing an undeclared economic blockade on it—choking off imports of petroleum, medicines and earthquake-relief material. Oli had said the blockade led to a situation that was worse than war-time. Pangeni said, “At that time, petrol and gas were illegally imported in huge quantities from India.” He added that the prohibition of Indian currency would hinder illegal activities in border areas. Deependra Bahadur Chhetri, a former governor of the NRB, echoed Pangeni’s opinion.
But some believe that banning Indian currency will bring its own share of difficulties. Shekhar Golchha, the director of Golchha Organisation, a private business house, said the move will create problems for people living along the border, as well as poor Nepali migrant workers. According to him, there are around 3 million Nepalis working in India who bring their earnings home in cash as they do not have the documents needed to open bank accounts. “To see business in Indian currency as a dominance of India is ultra-nationalism,” he added.
When I discussed Golchha’s views with Pangeni, he said, “Keeping the currency is not a solution, even if banning it creates a temporary problem. Connecting Nepali workers with the banking system and making digital money-transfer easy can solve the issue.” To address potential difficulties in border areas, Pangeni said, the “Nepal government should open more currency-exchange counters on the border.”
The ban will likely impact Nepal’s tourism industry, which draws much of its revenue from India. Of the more than 1 million tourists who visited Nepal between January and November 2018, almost 145,000 were from India. The Nepal government has declared 2020 as the “Visit Nepal Year,” aiming to boost tourism and increase the number of visitors to 2 million a year.
Nepal is not the only neighbouring country to enforce a ban on Indian currency. In August 2017, the central bank of Bhutan, the Royal Monetary Authority, prohibited the exchange of Indian notes of Rs 500 and Rs 2,000 in the country, and asked the public to not accept these denominations “in any mode of business in Bhutan.” But it reversed the decision within a year, and allowed citizens to carry Indian currency worth Rs 25,000. The bank said, “RMA shall not be liable or responsible in case of any policy changes by the Reserve Bank of India, including demonetization of INR currency notes in the future.”
This news report first appeared in Karwan, The Caravan’s Hindi website. It has been translated and edited.