Nepal and Bhutan are the only two other countries that accept some Indian currency as legal tender. The note ban announced by the government on November 8, 2016 has caused severe problems for the people of both these countries, whose economies are heavily dependent on Indian currency.
According to agreements between India and Bhutan, Indian currency notes of Rs 500 and 1000 were not valid tender in Bhutan. This was also the case with Nepal till January 2015. However following Prime Minister Modi’s visit to Nepal in November 2014, the Indian government came to an agreement with the government of Nepal to allow the use of Rs 500 and Rs 1000 notes as legal tender in Nepal. Expecting the Indian government to honour this agreement, the government of Nepal has allowed the circulation of these high value notes as legal tender since January 2015.
Following the note ban, people in Nepal can neither deposit their old notes in their bank accounts, nor can they exchange the old notes for new ones. And they cannot get Indian currency in exchange for Nepalese currency, because Nepal’s Central Bank has no Indian currency to give its citizens.
According to Nepal’s ambassador to India Shri Deep Kumar Upadhyay, Nepal’s central bank, Nepal Rashtra Bank is fast running out of supply of the Indian rupee because the Reserve Bank of India has held back its quarterly supply to Kathmandu since the November 8 ban on old notes.
Under an agreement between the NRB and the RBI, the latter is supposed to send Rs 600 crore to its Nepalese counterpart each quarter, in exchange for an equivalent value in US dollars. But the RBI, running short of new notes since the November 8 announcement, has not delivered its last installment to Nepal, due two months back.
The governor of NRB has said that an estimated Rs 3,500 crore in old Indian Rs 500 and Rs 1,000 notes was in circulation in Nepal. But the Indian government has forbidden the Nepal government from allowing Nepalese people to deposit their money in the banks. The Indian government has declared that allowing people in India and Nepal simultaneously to deposit their old invalid notes in their bank accounts could facilitate the smuggling of notes by Indians across the open border for deposits through proxies in Nepalese accounts. This can then come back as unaccounted wealth into the Indian financial system. Citing the same reason, the Indian government has so far refrained from clarifying when and how it would take back the banned currency from Nepal.
At current exchange rates, Rs 500 is equivalent to 800 Nepalese rupees. But if India does not decide soon on when Nepalese citizens would be allowed to deposit their old invalid rupee notes in their bank accounts and when India will take those notes back and compensate Nepal with the equivalent amount of new notes, then people there may fear losing all the money they hold in invalid currency and may agree to exchange those notes illegally for Nepalese notes at unfair rates, the Nepal ambassador is reported to have said.
This crisis has affected the economy of Nepal quite severely. Trade across the Indo-Nepal border is mostly cash-based. Lower-end tourism in Nepal is also heavily dependent on Indian currency.
Bhutan's central bank, the Royal Monetary Authority (RMA) has also not received its designated supply of Indian currency from the RBI, since November 8 last year. The Indian government has adopted the same stand towards Bhutan, whose citizens hold an estimated (RMA estimates) Rs. 100 crore in old invalid notes. This has severely affected economic activities in that country, which depend largely on Indian currency.
As a result, the ordinary citizens in both those countries are suffering. The governments of both Nepal and Bhutan have expressed resentment at the fact that they were not consulted or informed of the note ban decision, when such a major decision was likely to gravely affect their economies.
The Indian state has always used its superior position to dominate and cruelly interfere in the affairs of smaller countries in its neighborhood such as Nepal and Bhutan, through various forms of economic pressure and blackmail. Recently, about a year ago, it organized a blockade for over 2 months, at the Indo-Nepal border, causing severe hardship to the Nepalese people, with the aim of interfering in the political affairs of Nepal. In the past, it has gone to the extent of cutting off vital supplies to Bhutan as well, in an attempt to influence the political affairs of that country. Once again now, through its demonetization decision, the Indian state is squeezing these countries and causing immense suffering to their people.