Kathmandu, November 15:

Due to increased trade deficit and decreasing inflow of remittances, the Indian Currency (IC) reserve at the Nepal Rastra Bank (NRB) is declining at a fast pace for the last couple of months.

As a result, the central bank purchased IC worth a whopping $90 million last month from Reserve Bank of India, and is preparing to buy an additional IC worth $100 million soon, said a highly-placed NRB source.

Earlier, the central bank used to purchase IC once a year or so. According to him, the total IC reserve in the Nepali banking system is estimated at one billion Indian rupees only. “This is probably the first time that NRB bought IC worth $90 million within 28 days. The central bank had bought IC equivalent to $50 million for about an entire year some two years back,” said Ramjee Regmi, executive director at NRB Foreign Exchange Management Department.

He further stated that though purchase of IC by paying US dollars is not a problem, it is good to have a surplus reserve of IC in the treasury because of Nepal’s ‘widely-dependent’ trade relations with India.

As of mid-July 2006, Nepal’s overall gross foreign exchange reserve is estimated to be over Rs 165 billion, in which the convertible reserve accounts for 94.5 per cent.

The IC reserve used to be in the surplus when the trade balance between the two countries was stable, and India used to import gold via Nepal as well as the remittances from third countries used to enter Nepal via India. All these were stable sources of the Indian currency apart from remittances by thousands of Nepali workers in India.

The decrease in IC reserve has been attributed to various reasons, widening trade deficit and decreasing inflow of remittances from India, being the major ones. Moreover, use of IC denominations of 500 and 1,000 is illegal in Nepal.

Taking into account trade statistics of 2005-06, Nepal’s imports from India rose significantly by 23.3 per cent vis-à-vis slow exports of 5.4 per cent. As a result, India’s share in the total foreign trade of Nepal has already reached 63.6 per cent in 2005-06, up from 61.3 per cent in the previous year.

The significant rise in imports from India has been ascribed to a whopping rise in the import of petroleum products by 26.3 per cent, accounting for 30.8 per cent of the total imports. Nepal buys petroleum products worth over IRs 2.5 billion every month from India, which also absorbs a large amount of Indian currency.

Regmi underlined the need for allowing money transfer agencies to transfer remittances from India like they have been doing from third countries. As of now, only commercial banks can transfer Indian Currency and it is not open for private money transfer agencies.