Kathmandu. As the Indian rupee continues to weaken against the US dollar, its direct impact is being seen on the Nepali economy.
The debate on policy review has surfaced in recent days, saying that Nepal has to bear the burden of fluctuations in the Indian rupee and dollar due to the decades-long stable exchange rate (peg) system with India. One person is saying that the time has come for a change of pace, while the other experts argue that even though this debate is necessary, the time for a decision has not yet come.
Nepal has been following a stable exchange rate of 160 Nepali rupees to 100 Indian rupees with India. It is believed to have played a role in price stability, border trade facilitation and black market control. However, when the Indian rupee weakens against the dollar, the structure of the Nepali rupee also automatically depreciates is increasing the pressure of inflation in the import-oriented economy.
In recent months, the country’s currency has weakened against the dollar, leading to an increase in the cost of petroleum products, foodstuffs, medicines and raw materials. The impact is being felt at all levels of industry, construction and consumers. “Nepal’s exchange rate is not only driven by our internal economic situation but also by the relationship between India and the dollar,” says an economist. ’
Banking sector experts say that while the stable exchange rate provides short-term stability, it has limited monetary policy independence in the long run. “The central bank’s policy effectiveness in interest rates, liquidity management and credit expansion is weakened due to pegs,” says a former banker. ’
Other experts, however, warn that changing the exchange rate system with India right now could be risky. They argue that a stable exchange rate is acting as an anchor for an import-dependent economy like Nepal, with weak production capacity and an open border. “If the peg is removed, there may be price volatility, foreign currency black market and financial uncertainty,” said a banker, “There is a history of Nepal returning to a stable exchange rate even though it was used in the past like ‘currency basket’.” ’
The banker said that the stable exchange rate has helped maintain single-digit inflation. “It has played a big role in protecting the purchasing power of the general public,” the banker said.
International financial institutions have also been suggesting Nepal to continue with the current exchange rate regime. Experts say that although the debate on changing the stable exchange rate with India has intensified due to economic pressures and the international environment, the decision has not been easy. According to experts, the main question now is not ‘whether to change the peg or not’, but ‘how to strengthen the economy in the middle of the peg’. They conclude that without production growth, export promotion and structural reform, exchange rate changes alone will not solve the problem.
