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Kathmandu Saturday January 06, 2001 Paush 22, 2057.
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Indian currency and monetary policy
This refers to news story "NRB to study magnitude of IC
circulation" dated January 3, 2000 TKP and the comment made by Dr Mohan Man Sainju
and others that "Nepal Rastra Bank is slowly losing its control over major economic
variables such as inflation and interest rates" because of the circulation of Indian
currency ("twenty five percent of money demand") in Nepal.
I feel that Dr Sainju, like a few of our professional economists, is not
aware of what is popularly known as the "impossible trinity", developed largely
by Prof Robert Mundell in the sixties for which he was awarded the Noble Prize. We cannot
have all three: free capital movement just like between Nepal and India, a fixed exchange
rate, just like between Indian and Nepalese currency, and an effective monetary policy. A
country must choose two out of three. Nepal has chosen the former two and has, therefore,
abandoned the use of monetary policy to check inflation, change interest rate and even to
help the implementation of poverty alleviation programme.
Nepal Rastra Bank cannot even determine domestic money supply but only the
division of the composition of money supply between domestic and foreign assets. Given the
fixed exchange rate with Indian currency, Nepal’s monetary policy has now to be
consistent with India. In a report submitted to the Executive Board last year, the staff
of the International Monetary Fund was even more straight: "The fixed exchange rate
requires that domestic monetary conditions be consistent with the peg and monetary policy
be broadly harmonized with that of India."
Raghab D Pant
Kathmandu
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