Continuous depreciation of Indian rupee vis-à-vis the US dollar has hit the Nepali rupee again, dragging it to an all-time low of 110.37 on Friday.
Nepali currency is pegged with the Indian currency at 1.6:1.
According to Nepal Rastra Bank, the value of Nepali rupee has been gradually sliding against the US dollar since mid-April. Based on the exchange rate for Friday, Nepali currency has depreciated by around 5.5 per cent over the last two months.
The slump in the Indian currency is rooted in concerns related to high crude oil prices. Oil prices in the global market inched up further as brent crude rose $1.31 to settle at $77.62 a barrel, according to Indian media reports.
“On the other hand, the currency market was nervous after the Reserve Bank of India painted a gloomy picture of the banking sector in its bi-annual financial stability report,” Times of India reported.
Weakening Nepali currency against the greenback has posed risks for import-based Nepali economy. Though this situation gives a reason for exporters to cheer as they could earn more from exports in Nepali currency, importers will feel the pinch.
The country’s balance of payments (BoP) deficit is widening every passing month as imports are skyrocketing. The country’s BoP deficit stood at Rs 18.93 billion and current account deficit also widened to Rs 191.02 billion in the first 10 months of this fiscal,
according to Nepal Rastra Bank. As imports will be dearer, the BoP situation will take a further hit, according to economists.
A weaker currency makes imports costlier and it will simultaneously create an inflationary pressure on the economy. Likewise, the country will lose out while repaying interests and principals of foreign loans, which need to be paid in US dollars. Dollar-denominated power purchase agreements of Nepal Electricity Authority (NEA) will compel NEA to pay more to the power suppliers.
On the brighter side, the country could reap certain benefits from the appreciation of the US dollar. The remittances that migrant workers send home will have more value. So, the families receiving remittances will receive more of Nepali currency.
The government’s revenue that is collected at customs points will also increase as the price of imported goods rises. Nepal could even attract more tourists by spreading the message that the purchasing power of dollar in Nepal has surged along with currency depreciation.
A version of this article appears in print on June 29, 2018 of The Himalayan Times.