Spread the love

Rupee’s pegging against the Indian currency is the main reason, economists say

Kathmandu, Aug 31: The Nepali currency has been steadily losing value against the US dollar. According to Nepal Rastra Bank, one dollar was worth 81 rupees in 2011/12. In the 15 years since, the rupee has weakened by 59 rupees. As of today, a dollar trades at 140.82 rupees. In the last five years alone, the rupee has depreciated by Rs 22.5.

Economists say this decline is not due to Nepal’s own economy but because of its fixed peg with the Indian rupee. Since the Nepali rupee is tied to the Indian rupee at a constant rate, any fluctuation of the Indian rupee against the dollar directly affects Nepal. When India’s economy strengthens, the Nepali rupee also gains, but when the Indian rupee weakens, Nepal suffers depreciation.

Data show that between mid-July 2024 and mid-July 2025, the Nepali rupee fell 2.66 percent against the dollar. The previous year it had depreciated by 1.64 percent. More than 80 percent of global trade is conducted in US dollars, and neither the euro nor other currencies have been able to replace it. Rising dollar rates have also pushed up the prices of gold, food, and daily essentials worldwide.

For Nepal, a stronger dollar has mixed effects. On one hand, remittance inflows rise since workers abroad can send back more money in rupee terms. This helps increase foreign exchange reserves. Tourism and export industries also benefit, as they earn in dollars. Exporters, in particular, can make higher profits when the dollar rises.

On the other hand, Nepal faces more losses than gains. Imports become expensive, pushing up market prices. Industries dependent on foreign raw materials see higher production costs. Government liabilities grow as external loans and interest payments become costlier. The World Bank’s recent interest rate hikes further increase Nepal’s debt burden. Dividend repatriation by foreign firms also becomes more expensive for Nepal. Students, patients, and tourists going abroad face higher costs.

The High-Level Economic Reform Commission has suggested exploring alternatives to the fixed peg with India. It argued that with growing trade deficit with India and possible future opening of the capital account, Nepal must prepare for a shift towards a flexible exchange rate. Economists stress the need to boost productivity, keep inflation low, and adjust the nominal exchange rate when necessary to avoid overvaluation.

The government has already amended laws to allow Nepalis to invest directly abroad, which was earlier restricted. Still, Nepal maintains a convertible current account but a controlled capital account. If Nepal fully liberalizes the capital account, the peg with the Indian rupee will not be sustainable. In that case, Nepal would need to move to a floating exchange rate system.

Nepal has followed a fixed exchange rate with the Indian rupee since 1960. While the level has been revised at times, it has remained constant at 100 INR to 160 NPR since 1992. Economists argue that keeping the same peg for so long has ignored changes in the economy, especially as India’s growth and productivity have outpaced Nepal’s. Nepal’s large trade deficit with India is offset only by strong remittance inflows that help manage supply of Indian currency by selling dollars.

In short, the dollar’s rise affects Nepal mainly because of its dependence on India’s exchange rate. This impacts trade prices, debt repayments, and the wider economy.

People’s News Monitoring Service