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Kathmandu Wednesday January 03, 2001 Paush 19, 2057.
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NRB to study magnitide of IC circulation
By Prem Khanal
KATHMANDU, Jan 2 - As the circulation of Indian Currency (IC) is increasing
in the domestic
economy, Nepal Rastra Bank, the central regulatory body, has initiated a comprehensive
study.
The study, expected to complete within two months, will analyze the magnitude
of IC circulation and its impact on the national economy.
Dr Yuba Raj Khatiwada, Chief Economic Advisor at NRB says the use of IC in
domestic transaction is growing, however, "it is very difficult to pin point the
exact volume of IC use for transaction purpose".
NRB officials estimate that the use of Indian Currency in local business
transactions has exceeded 25 percent of the total money supply. Monetary experts argue
that if IC circulation in the domestic business transaction is more than 25 per cent of
the total transactions, then it could create a potential risk for monetary policy.
"Twenty-five percent of money demand is being fulfilled by the IC means
that NRB is slowly losing its control over the major economic variables such as inflation
and interest rates, " says Dr Mohan man Saiju, Former Vice-Chairman of National
Planning Commission. Money supply is one of the tools that the central monetary authority
uses to play with inflation and interest rates. With increasing substitution of the local
currency by the foreign currency, this tool becomes blunt.
Dr Khatiwada also admits the challenge lying ahead with the monetary
authority and says, "such a strong presence of the Indian currency in the domestic
market often compounds the estimation of aggregate demand for the local currency often
leading to mismatch between the demand and supply."
The use of Indian currency, which was prevalent only in the Terai belt
adjoining India in the past, has now spread to other parts of the country as well,
especially in the tourist cities like Pokhara and Kathmandu. With the increased flow of
Indian tourists to Nepal during the last few years, which accounts about one-third of the
total tourist arrivals, the circulation of Indian currency has been reinforced. Indian
currency enjoys open and unlimited convertibility in Nepal.
In some of the bordering towns, businessmen openly admit that they prefer
Indian currency to Nepali currency. The reason is obvious: Indian currency is accepted on
either side of the border, while Nepali currency is not accepted in India.
The low interest rate offered by the commercial banks on the deposit is
another reason behind the surge of IC circulation. As a result, boarding Indian informal
banks in recent years have attracted large volume of domestic capital by offering
relatively higher interest rates and other attractive schemes.
"The growing trend will definitely encourage capital flight to India,
which is dangerous threat for a small economy like ours," Dr Sainju said.
The mounting export to India in recent years, particularly after the entry of
Indian multinational investment in Nepal, and after the signing of Nepal India Trade
Treaty, is another influential factor for the rise in IC reserve with NRB, which has
crossed Rs 8.27 billion during the first three months of the current year. Dr Khatiwada,
however, says "since such payments come through the banking channel, its role for
rising IC circulation is least". But the expanding export of informal sector to India
and huge remittances that Nepalese bring in to the country can be partially blamed for
growing use of IC, he said.
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