Context

Nepal has declared Indian currency notes of denominations ?200, ?500 and ?2000 to be illegal, asking tourists and migrants to refrain from carrying notes above ?100, according to a recent media report. The ban on all higher denominations declared by the Nepalese government this week is expected to add to the woes of migrant labourers and Indian tourists.

Countries like Nepal and Bhutan have always used and traded in Indian currency, for the sake of simplicity, but recent economic upheavals have made it difficult to maintain the status quo. This move, therefore, can also be seen as a formal stand on the issue of exchanging counterfeit and black money across borders.

About

The Nepalese Minister for Information and Communications announced that the government does not have Indian bank notes higher than ?100 denomination, further asking Nepalese citizens to refrain from keeping or carrying them. According to the report, the government is specifically against Indian notes of ? 2,000 and ? 500 denominations, later adding ?200 to the banned category as well.

Apart from emphasising the earlier position on the Indian ?500 and ?2000 notes, the ministerial meeting also added the ?200 currency bill of India to the list. As per the latest declaration, ?100 and other lower Indian currency notes will remain valid in Nepal.

Background

The Indian government had introduced new banknotes of the three higher denominations during demonetisation in 2016. Official sources expressed their concern that people may still be bringing the banned Indian currency notes into Nepal, forcing the government to make this formal announcement. Furthermore, old Indian currency notes remained in private possession in Nepal even though they remained out of circulation in India, which further raised the possibility that black money from India, could end up in Nepal.

During the heyday of India’s demonetisation exercise, the Nepal Rastra Bank had declared that it would not allow circulation of the new ?500 and ?2,000 notes in the country. Nepalese Premier K.P. Sharma Oli said earlier in 2018 that demonetisation hurt countries like Nepal and Bhutan where the Indian rupee is widely used, adding that he would take this up with Indian leaders. However, everyone quickly adapted themselves to using the new Indian currency notes in the Nepalese market over the last two years.

Problems in exchanging or using the erstwhile notes of ?500 and ?1000, however, persisted in Nepal long before PM Modi’s note ban. That probably owed itself to an unfounded rumour that a bulk of counterfeit Indian currency enters our country via the porous Indo-Nepal border. Nepal was among the places from where nefarious elements would try to bring in fake notes of ? 500 and ? 1,000 to India. 

Impact

Tourism: Travellers visiting the Himalayan nation tend to carry Indian currency because they are used extensively by Nepalese businesses and people for their savings and transaction. Besides affecting Indian tourists who had spent in Indian rupees in Nepal so far, the move will also adversely impact Nepalese citizens working in India. They will now be required to send money back home via electronic means, or in cash transactions restricted to ?100 notes.

Trade: India, which is Nepal’s largest trading partner, supplies the majority of Nepal’s consumer goods. The move is likely to affect trade and small scale businesses as well, but that is likely to stabilise after a period of acclimatisation. 

Learning Aid

Practice question:

In light of recent ban on use of all Indian currency notes in Nepal, discuss the changing relations of India-Nepal.