The Indian Embassy in Kathmandu has queried the Nepal Rastra Bank (NRB) about the legal status of Indian banknotes in circulation in Nepal amid confusion over whether the Indian government would allow Nepalis to exchange banned Indian notes with legal tenders in Nepal.

On Friday, the embassy asked NRB whether Indian banknotes are treated as legal tenders in Nepal, according to Bhisma Raj Dhungana, head of NRB’s Foreign Exchange Management Department.

In response, NRB said it had allowed its citizens to possess up to IRs25,000 in the form of now-demonetised Indian currency of 500 and 1,000 denominations. “We also made it clear that Nepalis were allowed to hold the amount as per the Foreign Exchange Management Act notification of the Reserve Bank of India,” said Dhungana. “We also mentioned about NRB’s circular issued some two years ago allowing Nepali citizens to hold up IRs25,000 in the form of now-demonetised Indian currency of 500 and 1,000 denominations.”

Their conversation with an embassy official, according to Dhungana, was very positive, as “the embassy official said they were working out ways to take back the banned Indian currency held by Nepali citizens”. “We are hopeful of getting positive message by the next week,” Dhungana said.

During the conversation, the embassy official also asked NRB to forward a copy of its circular that allowed Nepalis to hold IRs25,000 in denominations of IRs500 and IRs1,000, an NRB official said on condition of anonymity.

“As the circular was in Nepali language, we translated it into English and forwarded it to the embassy on Friday,” said the NRB source. “They have indicated that we may receive positive news next week.”

As Sunday is public holiday in India, NRB is expecting their answer by Monday, the source added.

It has been more than three weeks since the Indian government banned circulation of 500- and 1,000-rupee banknotes. NRB and the Ministry of Finance have proposed Nepalis holding the nullified Indian notes be allowed to exchange them with legal bills within Nepal. India still has not spoken about what it intends to do with the scrapped notes held by Nepalis. This delay has affected hundreds of thousands of Nepalis holding big chunk of scrapped Indian banknotes. Many Nepalis who earn a living as daily-wage labourers in India, or those who visit the neighbouring country seeking medical treatment or rely on Indian markets to purchase daily essentials still hold these notes. Also, thousands of Nepalis on pilgrimage tours to India and those engaged in cross-border trade are said to have a big stock of now-defunct Indian banknotes.

The central bank has said 500- and 1000-rupee Indian banknotes worth IRs33.6 million is within the financial system in Nepal. The figure includes cash parked at vaults of banks, financial institutions and the NRB. But actual stock of banned Indian bank notes is expected to be much more because the Nepalis were previously allowed to carry the high denomination Indian banknotes worth up to IRs25,000.

Besides, those residing in areas bordering India usually stash Indian notes of larger denominations as they have to frequent Indian markets to buy goods.