New Delhi: India needs to “urgently” compensate Nepal for the scrapped Rs 500 and Rs 1,000 notes held by its citizens to avoid eroding recent goodwill, Kathmandu’s top diplomat here has cautioned, amid fears that India’s note ban is hitting the Himalayan nation’s economy.
Nepal’s central bank is also almost out of the Indian rupee that is legal tender there because the Reserve Bank of India has held back its quarterly supply to Kathmandu since the November 8 ban on old notes, Nepal’s ambassador Deep Kumar Upadhyay said.
The comments by Upadhyay, in an interview to The Telegraph at the country’s embassy, represent the sharpest call yet from Nepal for India to promptly redress an economic |challenge thrust upon Kathmandu by New Delhi that remains unabated even after December 30.
Failure to do so could force Nepalese citizens to succumb to middlemen promising to exchange the invalid Indian notes illegally and at unfair rates, and could in turn hurt a fresh rise in goodwill for New Delhi after a year of heightened tensions, he said.
“A decision should be taken urgently by India because people are losing confidence,” Upadhyay said. “Yes, India should have ideally discussed its plans (on demonetisation) with us earlier, but even now, a timely, decisive intervention can improve the situation. People should not in any way be caused loss.”
Chiranjeebi Nepal, governor of the Nepal Rashtra Bank (NRB), the country’s central bank, had told this paper in November that the country’s citizens held an estimated Rs 3,500 crore in old Indian Rs 500 and Rs 1,000 notes. Nepal and Bhutan are the only two countries apart from India where the Indian rupee is a legally valid currency.
Chiranjeebi Nepal had then said that Kathmandu was planning to ask all its citizens holding the banned Indian notes to deposit them in bank accounts.
But Upadhyay said the country refrained from that move — though it was legally entitled to take it, he emphasised — to support India’s efforts to curb the flow of unaccounted wealth back into the Indian financial system.
“We did not go that way because we support India, and because we recognise the open borders we have,” Upadhyay said. “That is why I am still hopeful and confident that India will respond to our need. But it needs to do so soon.”
New Delhi was worried that allowing deposits in India and Nepal simultaneously could facilitate the smuggling of notes by Indians across the open border for deposits through proxies in Nepalese accounts.
That is also the reason, Indian officials said, that New Delhi so far refrained from clarifying when and how it would take back the banned currency from Nepal and from Bhutan, whose citizens hold an estimated Rs 100 crore in old notes.
But India now needed to “promptly” take a decision on first opening a window for Nepalese citizens to deposit their old Indian notes in banks in Nepal, then taking them back and compensating Nepal, because the country’s economic activity was taking a hit, Upadhyay said.
Border trade that depends on cash “has suffered a lot”, Upadhyay said. And while top-end hotels that rely on swipe cards for payments have remained largely unaffected, Nepal’s lower-end tourism, which depends on Indian currency, has suffered, he said.
Nepal is also facing a macroeconomic crisis, Upadhyay said.
Under an agreement between the NRB and the RBI, the Indian central bank 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 instalment, due two months back, Upadhyay said.
“Because of this, the NRB is now almost out of stock,” Upadhyay said. “This is very embarrassing for the NRB and could be partly mitigated if India even infused some rupees, however little, on a priority basis into the NRB.”
It is ordinary Nepalese citizens though, Upadhyay said, who are today most vulnerable because of the absence of clarity from India on when it will take back the old notes from Nepal.
At current exchange rates, Rs 500 is equivalent to 800 Nepalese rupees. But if India does not decide soon on the future of old notes in Nepal, 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 rates unfair to them, the diplomat said.
“If India still promptly declares a window for exchange, and a mechanism to do so, people will hold on to their Indian notes,” Upadhyay said. “But if it does not, then that strengthens the hands of illegal currency traders.”
Any further delay by India could also offset perception gains made in recent months, he cautioned. India’s supply of 400MW extra electrical power in December, for instance, had in recent weeks staved off load-shedding in many Nepalese homes, Upadhyay said.
“People should not suffer and become desperate,” Upadhyay said. “Otherwise, the goodwill the relationship has at the moment in the minds of Nepalese people could also unfortunately suffer.”