Of late, Nepal's ability to manage the Indian Currency (IC) market has been shaky. For most of the problems Nepal faces—political, social or economic—the first resort for authorities here is often to point a finger, rightly or wrongly, to India and shirk from their own responsibilities. But a simple blame game is not going make the IC issue go away anytime soon. The reins are gradually slipping away from the regulating capabilities of Nepali monetary and law enforcement authorities, due to both their nonchalance and a sheer lack of sense of responsibility.

The mandarins at the Nepal Rastra Bank (NRB), the central monetary authority, unfailingly try to portray that the situation has never gone out of their hands. Their 

staple argument is that 'no business has actually been affected due to a scarcity of IC in the market. And cash-cards issued by Nepali banks can be easily used in India, providing an alternative solution.' But the scene on the ground paints an alarmingly different picture.

 

Each day, hundreds of Nepali youths cross the open border to India from, from Darchula in the west to Pashupatinagar in the east, armed with 10-15 ATM cards issued by Nepali banks. They queue in front of Indian ATM outlets, withdraw IC and re-enter Nepal in the afternoon to sell it on the black market. The flat margin is Rs 10 per hundred IC. They save six percent net. Supposing one is using five cards, each with a drawing limit of Indian Rupees (INR) 10,000—one can earns Rs 3,000 a day. If one has managed, say, fifteen cards with effective monthly drawing limit of INR 100,000, the monthly income amounts to more than Rs 90,000. This is a risk-less and handsome return by any standards. Indian banks operating along the border areas and authorities there have so far shown remarkable tolerance, except sometimes herding these youths with batons and surprising 

them by locking the ATM kiosks. This whole drama may not be outright illegal but is plainly shameful.

Additionally, while shopping in bordering Indian towns, bills now automatically entail a batta, or the difference of an additional Rs 10 per hundred of INR purchase. Media reports about IC black-marketing along the Nepal-India border as currency traders attach a premium to the exchange rate are now commonplace.

At each Indian airport immigration point, the first question, made rather threateningly by Indian security forces, to Nepal-bound passengers is: how many IC notes of 500 and/or 1,000 denominations do you possess?' Transactions against both of these denominations are banned in Nepal. But it is common knowledge that they are traded in any amount throughout Nepal, without any restriction, albeit unofficially. (It is interesting to note here that even the IC notes of 100 or 50 denominations, for example, are not legal tender for free circulation here but there are hardly any instances of authorities arresting anyone when IC notes change hands in the market).

 

IC sales to commercial banks have been highly rationed at INR 100,000 each per week by NRB. Even direct purchases from NRB are limited to INR 3,000 per person. If a commoner needs INR 5,000 in cash, it is an uphill, if not impossible, task to get it. But some bank managers have unique solutions. 'If you are ready to take INR 500 or 1,000 denomination notes, I may help you, unofficially,' they whisper. This indeed is a sordid management paradox.

The bulk purchase of IC against the US dollar by NRB in one fiscal year is approaching $1 billion, which is about six percent of our gross domestic product (GDP). That's a huge amount. Furthermore, any INR amount NRB supplies to the market dries out immediately. This suggests that IC is one of the prime mediums of capital flight from Nepal, which lacks an investment climate, primarily due to prolonged political instability. Or, in several cases, it has been the tool to invest in precious metals like gold.

What do all these factors suggest? First, unlike the NRB posture, the IC trade is not business as usual. This is not an issue that Nepal can afford to mismanage or ignore. As apparent in the batta market, Nepali currency has already devalued against the IC by some six percentage below the official rate. This has impacts on the economy, both in a ballooning trade deficit as well as the very credibility of the national currency.

Second, there is no alternative to supplying adequate IC to meet the market demand. Cash substitutes, like ATM cards, are no doubt useful but not sufficient. People want hard-cash back-up in the event of card or network failures and thousand of less techno-savvy Nepali travelers to India, like pilgrims, prefer to carry cash. The cost attached to across-the-border ATM services is another negative point for cash cards.

Third and most crucial, it is imperative to look into the causes, and endeavour to explore long-term solution, to this problem. One of the major reasons for the seemingly perennial scarcity of IC in the Nepali market is the ban on 500 and 1,000 denomination IC notes. The Indian attempt to prevent the inflow of fake IC notes (FICN) of higher denominations is understandable, as racketeers have often used Nepal as a transit for FICN to India. Thus, the increased scale and frequency of FICN movements have naturally worried Indian authorities. A consignment of INR 3 million was apprehended in Birgunj, last June. Just three weeks ago, the Indian Directorate of Revenue Intelligence reportedly seized a consignment of FICN worth INR 15 million in Cambodia, en route to India from the UK.

But is banning the transaction of these notes a full-proof solution? There are two bare facts. One, despite the ban, regardless of whether authorities acknowledge it or not, the use of these two notes is widespread in Nepal. Two, it is evident that Nepal is not only the route for FICN movement. Therefore, banning these notes in Nepal alone could be a psychological buffer but not a lasting, pragmatic solution.

Instead, both countries can put in place more effective measures to screen for fake notes as well as security mechanisms to prevent unlawful currency movement while lifting the ban. Nepali authorities must be able to convince their Indian counterparts that they have the required ability and institutional set-up to handle this. Also, the more transparent and legal transactions become, the easier they are to regulate.