Nepal hard hit by India’s Rs500, Rs1,000 demonetisation

Nepal's central bank has directed all banks, financial institutions and money transfer companies to immediately halt transactions with Indian currency notes of Rs1,000 and Rs500 denomination. 

The Nepal Rastra Bank (NRB) said it is in touch with the Reserve Bank of India to resolve problems arising from the Indian government's decision to withdraw these notes from circulation. In a surprise move, Prime Minister Narendra Modi on Tuesday announced the demonetisation of these notes to control corruption and inflation (See: All existing Rs500 and Rs1,000 notes denotified ). 

Reports in the Nepali media said people living in areas bordering India were facing difficulties following the move.

Indian currency is widely accepted across Nepal and accounts for almost 20 per cent of total monetary transactions in the country, official sources said. Following the Indian decision, Nepal's share market fell by 27 points.

The NRB may give people 15 days to exchange Indian currency at local financial institutions. They also said the NRB could collect the Indian notes and hand them over to India.

In a notice, the NRB said it would write to the Reserve Bank of India to help in the management of Indian currency and resolving the current crisis.

In the southern plains bordering India, Indian currency is used more than Nepali rupees for trade. The withdrawal of the Rs500 and Rs1,000 notes is bound to directly impact Nepal's currency market, economic experts said.

In the past, Nepal had banned the use of Indian Rs1,000 and Rs500 notes after large numbers of counterfeit notes were found in the country. The ban was partially eased during Prime Minister Narendra Modi's visit in 2014 and Nepalese citizens were allowed to obtain Indian currency worth Rs25,000.

Experts said the Indian government's decision would hit Nepalese pilgrims, traders, students and people who come to India for treatment.  Millions of Nepalese citizens also live in India and those residing and working in areas along the 1,800-km border are also likely to be affected by the move, they said.

The Indian government has allowed people to deposit old notes in their bank and post office accounts after showing identity documents such as passports or permanent account number (PAN) but experts said many Nepalese working in India do not possess such documents.