The Nepalese government has asked the Reserve Bank of India (RBI) to make all Indian bills, including Rs 200, Rs 500 and Rs 2,000, legal tender in the Himalayan state, where the Indian rupee is widely used.
India has been reluctant to allow high-denomination currency notes to circulate in Nepal, where currently only the Rs 100 note enjoys official acceptance, as this could lead to people stashing illegal cash and fuel the flow of fake banknotes.
While RBI is still to consider the request, made last Friday, the central bank’s decision will have far-reaching implications on bilateral relations, especially in light of Nepal’s increasing warmth with China.
Hundreds of thousands of Nepalese live in India, with more than 20 lakh working here.
The Indian rupee accounts for an estimated 25 per cent of the total money in circulation in Nepal, with the currency also used for the bulk of bilateral trade between the two countries. India is the largest trading partner of Nepal, a landlocked country located between India and China.
Also, the thousands of Indian tourists who visit Nepal every year have shown a preference to transact in the Indian rupee.
However, last month, the Nepalese government banned the circulation of Rs 200, Rs 500 and Rs 2,000 bills, which were introduced after India’s November 2016 demonetisation move but are yet to be notified by the RBI for use in Nepal.
The Narendra Modi government’s demonetisation exercise saw two denominations, the old Rs 500 bill and Rs 1,000, become illegal tender overnight.
Resentment for India
Besides Nepal, the Indian currency is also widely used in Bhutan, with people allowed to carry Rs 25,000 in Indian currency to the two countries.
In May 2017, the RBI exchanged Bhutan’s reserves of the demonetised bills, but didn’t extend the favour to Nepal, which still has an estimated Rs 10 crore in the old banknotes, despite multiple requests from Kathmandu.
India’s failure to exchange its stash of demonetised notes and not make the new notes legal tender in Nepal has stoked resentment against New Delhi in the country.
The Indian authorities feared that allowing the exchange of Nepal’s demonetised reserves may help black-money holders convert their illegal cash into legal money.
However, according to the RBI’s annual report, released in August, 99 per cent of the demonetised currency notes returned to the system.