![]() Since 1993, the exchange rate of the Nepali rupee with other convertible currencies has been market-determined in line with the exchange rate of the Indian rupee with convertible currencies. In line with the economic liberalisation policy followed since the mid-1980s, Nepal introduced current account convertibility in 1993, effectively pegging the Nepali rupee to the Indian rupee at the rate of 1.60, the same exchange rate which was fixed in 1960 when the two currencies were pegged for the first time, the report said. Nepal adopted a different kind of exchange rate system for convertible currencies. Nepal has been following a pegged exchange rate system with the Indian rupee with periodic exchange rate corrections through revaluation or devaluation. Nepali currency becomes strong automatically when Indian currency is strong, and weakens when Indian currency weakens. But even if the Nepali rupee was not pegged to the Indian rupee, it would still sink as export earnings are minimal, and it would have been difficult for Nepal to manage its currency,” he said. "This situation led to a depreciation of the Indian currency, and it dragged down the Nepali rupee with it. ![]() "With the Fed increasing the interest rate, global investors turn to the US which increases demand for dollars, pushing up its cost against other currencies in the international market," he said. “The increase in the interest rate by the central bank of the US impacts the economies of emerging and developing countries,” Bhatta said. The federal fund rate is the inter-bank interest rate which was increased by 0.75 percent. On September 21, the Federal Reserve Bank increased the federal fund rate from 2.5 to 3.25 percent. This translates into a monthly consumption of Rs400 billion which swells in September and October during the festival season.Īccording to Bhatta, the dollar soared after the Federal Reserve Bank, the central bank of the US, increased the interest rate for the fourth time this year-by 0.75 percent three times and 0.50 percent once. "But at the same time, import costs will increase, which will deplete the country's foreign exchange reserves faster."Ĭonsumer spending accounts for 90 percent of Nepal’s Rs4.8 trillion GDP, according to Nepal Rastra Bank. As the festival season has begun, the stronger dollar will increase the purchasing power of Nepalis who send remittances home," said Bhatta. "Tourist arrivals have slowed and remittance is also on a steady growth trend, so the rising dollar has nominal gains for Nepal. But if we look at the country’s export trade, its base is small, amounting to just Rs200 billion annually,” he said. “The appreciation of the dollar is also an opportunity for export, tourism and remittances. “Being an import-based economy, the appreciation of the dollar means higher cost of imports, fuelling inflation further,” said Gunakar Bhatta, spokesperson for Nepal Rastra Bank, the country’s central bank. Since Nepal has been performing poorly on the export front, a stronger dollar will not benefit the country much. On the positive side, a stronger greenback means higher remittance earnings in terms of Nepali rupees, experts say. ![]() The appreciation of the dollar may fuel inflationary pressure. The strengthening of the greenback will further widen the trade deficit for an import-based economy, experts say. The Nepali rupee suffered the largest single-day drop of 1.01 against the United States dollar to sink to an all-time low of 130.90 on Tuesday.Īccording to reports, the rupee’s plunge is an effect of the steady depreciation of the Indian rupee to which it is pegged.
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