Why a dollar costs about Rs 155: Nepal's 1.6 peg to the Indian rupee explained
Nepal's currency moves with India's, which has weakened this year, and the arrangement brings stability at the cost of monetary independence.
Every working day Nepal Rastra Bank, the central bank, publishes the rates at which banks may buy and sell foreign currencies. On 10 October the buying rate for a US dollar was Rs 154.48 and the selling rate Rs 155.08, Khabarhub reported, up from Rs 153.81 and Rs 154.41 earlier in the month. One line in the table never changes: 100 Indian rupees cost 160 Nepali rupees, give or take a narrow spread.
That fixed rate, known as the peg, is the key to understanding almost everything else in the table.
How it works
Nepal has fixed its currency to India's at 1.6 since 1993, an arrangement whose roots go back to 1960, according to a column in The Kathmandu Post. The central bank does not set a target for the dollar. Instead, the Nepali rupee's value against the dollar, the euro or the Qatari riyal is simply the Indian rupee's value multiplied by 1.6.
The arithmetic is easy to check. On 28 September the Indian rupee touched 96.20 to the dollar, its weakest in nine weeks, according to Trading Economics, which cited a strong dollar, high oil prices and foreign investors selling Indian assets. Multiply by 1.6 and the result is about Rs 154, close to the rate Nepal Rastra Bank published a few days later. In early August, the central bank's buying rate had been around Rs 152, Ekantipur reported. Over the 12 months to late September, the dollar gained about 8.4% against the Indian rupee, and therefore against the Nepali rupee too.
To keep the peg in place, the central bank stands ready to buy and sell Indian rupees at the official rate, and buys or sells dollars when market pressure pushes the rate away from 1.6, as the financial economist Kiran Paudel described in Online Khabar. That requires a large stock of foreign reserves.
Why Nepal keeps it
The case for the peg rests on India's weight in Nepal's economy. India accounts for more than 60% of Nepal's trade and is a leading source of investment, the Post column noted. The border is open, and a large share of the goods in a Nepali household's shopping basket come from India. A fixed rate removes currency risk from all of that trade, and from the earnings of Nepalis who work in India and send money home. Supporters also argue that borrowing the Reserve Bank of India's monetary discipline has helped keep Nepal's inflation stable.
Nepal can currently afford to defend the peg. Gross foreign exchange reserves stood at $25.84bn in mid-August, enough to cover 21.8 months of merchandise imports, according to central bank data reported by ShareSansar. Remittances, which rose 21.2% year on year in the first month of the fiscal year, keep the reserves topped up.
What it costs
The peg has critics. Nepal cannot set its own interest rates independently of India's for long without putting pressure on the exchange rate, so it cannot respond fully to a downturn at home. The International Monetary Fund has suggested the rupee may be overvalued in real terms, the Post column noted, which makes Nepali exports harder to sell and Indian imports cheaper. And Nepal inherits India's shocks: when the Indian rupee falls against the dollar, so does Nepal's, raising the cost of fuel, gold and debt payments priced in dollars. The high domestic price of gold this year is partly a currency story.
Defending the peg can also drain reserves. Paudel noted that reserves fell between July 2021 and May 2022 as the central bank sold dollars into the market, a reminder of how quickly a comfortable position can change when imports surge.
Will it change?
Few in Kathmandu expect a change soon. Some economists favour a gradual move towards a managed float or a peg to a basket of currencies weighted by trade, as the Post columnist proposed, rather than an abrupt break. With reserves near record levels and inflation moderate, the central bank has little reason to alter an arrangement that has lasted more than three decades. For investors and businesses, the practical lesson is simple: to forecast the Nepali rupee against the dollar, watch the Indian rupee.
How this story was made: researched and written by The Standard’s desk with AI assistance, from the published reporting and official data credited below, and checked against those sources. Our standards.
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