NEPALI PAISA
Looking at the Nepali side of the data, real GDP growth is negative continuously after 2003. The huge gap in growth between the GDP of the two nations definitely warrants a readjustment of the current fixed peg of INR-NPR at 1.6000. FCY reserves of both Nepal Rastra Bank (NRB) and Reserve Bank of India (RBI) have witnessed geometric rise. However the ratio of growth of Indian reserves has far outpaced that of Nepal. This is a clear indication that the Government of Nepal should rethink the peg that it has left unchanged since 12 February 1993.
Nepal is continually having negative Trade Balance with India and the rest of the world. This Trade Gap is widening year by year and the only way to check this Trade Gap will be to devalue NPR against INR, which is the root of cause of Nepal's ever rising imports.
A school of thought in the Nepali intellectual circle is trying to justify the existing INR-NPR peg at 1.60. According to this, Nepal's rising trade imbalance with India is due to import of petroleum oil against the payment of INR. If we permit additional items to be imported from India in USD, this will solve the problem, as we have excess USD reserves and positive BoP despite a negative Trade Gap. The positive BoP is due to inflow of invisibles and remittances by the large number of Nepalis working abroad. But this will not solve the problem, as the overvalued NPR will continue to subsidize the imports and undercut the exports. This can't be an alternative to currency devaluation.
The tables depict the historical exchange rate movement among NPR-USD-INR. Due to fixed pegging, NPR has appreciated against the USD in line with INR since 2003 onwards. There is a lot of reason for INR to get appreciated during this period. Viz.
1. Indian GDP has grown about 10% during the review period, whereas Nepal's GDP growth is negative during the same period.
2. A large sum of funds has been injected into Indian equity markets by Foreign Institutional Investors (FII) whereas there is no FIIs related inflow of foreign currency funds into Nepal.
3. Indian inflation has stood well below six percent. Nepal's inflation during the same period is far beyond that. In fact, real inflation level in Nepal is in two digits whereas the official rate as of running FY is 8% only.
4. India is attracting large sum of foreign capital as FDI. FDI in Nepal is negligible.
5. Country risk level of Nepal is one of the worst in the World. India has been rated as investment grade by the international credit rating firm Moody's
6. Interest rates in India are far more attractive than in Nepal.
7. RBI is bank of world class reputation; NRB is an unknown quantity to the financial world.
The above reasons well justify the appreciation of INR against the USD. However, the above facts warrant an immediate depreciation of NPR against all major currencies of the world including INR and USD.
Nepal is continually having negative Trade Balance with India and the rest of the world. This Trade Gap is widening year by year and the only way to check this Trade Gap will be to devalue NPR against INR, which is the root of cause of Nepal's ever rising imports.
A school of thought in the Nepali intellectual circle is trying to justify the existing INR-NPR peg at 1.60. According to this, Nepal's rising trade imbalance with India is due to import of petroleum oil against the payment of INR. If we permit additional items to be imported from India in USD, this will solve the problem, as we have excess USD reserves and positive BoP despite a negative Trade Gap. The positive BoP is due to inflow of invisibles and remittances by the large number of Nepalis working abroad. But this will not solve the problem, as the overvalued NPR will continue to subsidize the imports and undercut the exports. This can't be an alternative to currency devaluation.
The tables depict the historical exchange rate movement among NPR-USD-INR. Due to fixed pegging, NPR has appreciated against the USD in line with INR since 2003 onwards. There is a lot of reason for INR to get appreciated during this period. Viz.
1. Indian GDP has grown about 10% during the review period, whereas Nepal's GDP growth is negative during the same period.
2. A large sum of funds has been injected into Indian equity markets by Foreign Institutional Investors (FII) whereas there is no FIIs related inflow of foreign currency funds into Nepal.
3. Indian inflation has stood well below six percent. Nepal's inflation during the same period is far beyond that. In fact, real inflation level in Nepal is in two digits whereas the official rate as of running FY is 8% only.
4. India is attracting large sum of foreign capital as FDI. FDI in Nepal is negligible.
5. Country risk level of Nepal is one of the worst in the World. India has been rated as investment grade by the international credit rating firm Moody's
6. Interest rates in India are far more attractive than in Nepal.
7. RBI is bank of world class reputation; NRB is an unknown quantity to the financial world.
The above reasons well justify the appreciation of INR against the USD. However, the above facts warrant an immediate depreciation of NPR against all major currencies of the world including INR and USD.
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