Nepal will keep its currency pegged to the Indian Rupee to ensure stability in the financial system. The pegging was last reviewed in 1994 when the exchange value was revised from 145 to 160 Nepalese rupees for every 100 INR.
The Nepalese rupee is the official currency of Nepal. The Nepalese rupee was introduced in 1932 and it replaced the Nepalese mohar at 2:1. Nepalese rupee is subdivided into 100 paisa. The issuance of the currency is controlled by the Nepal Rastra Bank. The Nepalese rupee is pegged to the Indian rupee at 1.6:1.
A currency peg is a country or government’s exchange-rate policy of attaching, or pegging, the central bank’s rate of exchange to another country’s currency. Also referred to as a fixed exchange rate or a pegged exchange rate, currency pegs stabilize the exchange rate between countries, which allows for accurate long-term predictability for business planning and can anchor rates at advantageous levels for large importers.
In Nepal, both the Nepali and Indian rupees were legal tender until 1956. Each day the exchange rate between the two currencies used to be determined by the private money changers on the basis of demand and supply. Sufficiency of Indian rupees or their lack resulted in the swings in exchange rates.
However, the change in the exchange rate on a day-to-day basis was an irritant for the people. Quite often, it affected trade and other economic activities between the two countries.
Therefore, as soon as the Nepal Rastra Bank, the central bank of the country, was established in 1956, it began to work towards making the Nepali rupee the sole legal tender and tried to do away with the existing dual-currency system in Nepal. Accordingly, the dual currency system was abolished under Nepal Currency Circulation and Expansion Act of 1957.
A new single currency regime was established under which the Nepal Rastra Bank pegged the Nepali rupee to the Indian rupee and fixed the exchange rate at 160 Nepali rupees for Indian 100 rupees. Such a provision entailed that the Nepal Rastra Bank could buy and sell any amount of Indian rupees at the given exchange rate.
Therefore many exchange counters were opened in different parts of the country to provide this service. Also, the banking institutions in Nepal were authorised to facilitate the exchange of these currencies at the fixed exchange rate.
Significantly, on June 6, 1966, the Indian government substantially devalued its currency. Nepal on its part had to do little as the Nepali rupee had already been pegged to the Indian rupee. But the end result was that the Nepali currency automatically appreciated vis-à-vis the Indian currency on account of the pegging factor.
As such, the new exchange rate between the two currencies was established at Nepali rupees 101 equivalent to Indian rupees 100.