Kathmandu, January 14
Nepali rupee has tumbled to over a 28-month low, as the Indian rupee, with which the country’s currency is pegged, came under pressure due to growing demand for US dollars.
Nepali rupee will open for trading at 107.83 against the US dollar on Friday, shows the reference rate of Nepal Rastra Bank (NRB), the central bank.
The last time the rupee had fallen to this level was on September 5, 2013, when the exchange rate stood exactly at 107.83. This exchange rate is the second lowest in the history of Nepal.
Nepali rupee had plunged to an all-time low of 109.03 a dollar on September 4, 2013.
Nepali rupee’s rise and fall depends on the movement of the Indian currency because Nepali rupee is pegged to the Indian rupee at 1.6.
Today, Indian currency opened for trading at 67.05 per dollar and rose to 67.03 during intra-day trading, before closing at over a 28-month low of 67.29.
The Indian currency is currently under pressure as foreign institutional investors are continuously offloading shares in line with global selloff. This is raising demand for the greenback.
Overseas investors sold $174 million more Indian shares than they bought this week through January 13, Bloomberg’s latest data show.
“Withdrawals last week, at $383 million, were the biggest since the five days ended December 4,” Bloomberg has said.
India’s benchmark equity index, BSE Sensex, today dipped 0.33 per cent. With this, Sensex has shed 5.2 per cent since January 1.
As the value of Indian stocks is eroding, traders, according to Reuters, expect the Indian rupee to weaken further to around 67.50 in the near term. Also, falling oil prices and volatility in China are expected to pull down currencies in
India and other emerging markets.
“I think the Indian central bank would generally be comfortable with the way the currency is behaving,” Reuters quoted Rahul Bajoria, regional economist with Barclays in Singapore, as saying.
“Inflation is under check and it will allow the Reserve Bank of India to let the Indian rupee depreciate in a controlled manner, especially if the dollar continues to strengthen,” Bajoria said, adding that some depreciation in the currency would benefit exporters.
He expects the Indian rupee to weaken to 69 to 70 to the dollar by the year-end.
If Indian currency falls to this level, the value of Nepali rupee will automatically depreciate.
A weak currency actually benefits recipients of remittance here, as they will get more Nepali currency while exchanging money sent by Nepalis working abroad.
A weak currency also provides leverage to exporters, as foreign buyers will get more of local currency to purchase goods or services here while exchanging dollars.
But this theory does not always apply in Nepal where prolonged hours of power cuts and other structural problems work as disincentives for exporters. Hence, weak currency has not been able to give a lift to Nepali exports.
While there is little improvement on exports front, imports — except in the first five months of this fiscal year — have continued to rise because of the nation’s status as ‘net importing country’.
This means a weak currency will only stoke inflation in a country like Nepal because importers will have to pay more of domestic currency while purchasing foreign goods priced in US dollars.
A version of this article appears in print on January 15, 2016 of The Himalayan Times.