IC crunch deepens

KATHMANDU, March 22: Nepal Rastra Bank (NRB) has reduced exchange limit for Indian currency (IC) as alarming surge in demand of IC both in the domestic market as well as cross-border withdrawal of Indian rupee through plastic cards spurred informal currency market in the country.

Once coming into effect, which is likely on Tuesday, Nepali traders and other clients will be able to exchange only IRs 10,000 at one time and a maximum of IRs 100,000 in a month either from banks or money changers or Automated Teller Machines (ATMs) in India, said a source.


Previously, the central bank was allowing the banks to exchange as much as IRs 25,000 at one time and a maximum of IRs 200,000 in a month to their clients. Clients holding plastic cards were allowed to withdraw as much as IRs 25,000 in a day from Indian banks.

Bankers said the new changes will further deepen scarcity of IC giving a new impetus to the black market. Amid shortage, when banks and money changers are not issuing IC as per the demand in the market, traders said they are already paying Rs 165 to buy IRs 100, which is Rs 5 higher than the official exchange rate, in informal market.

IC has been in short supply for over a year, particularly due to the ballooning trade deficit, which touched Rs 177 billion in 2009/10, widespread under-invoicing and booming illicit trade. To manage the supply, the central bank had purchased IC worth Rs 102 billion and supplied Rs 84 billion of that in the market in 2009/10.

In the current fiscal year too, the bank has already injected IC worth Rs 67 billion in the market till mid-March 2011.

NRB officials said the volume of IC supplied during the period should have been enough to fulfil trade financing and other needs. However, unavailability of IC in the market suggests otherwise.

"This indicates emergence of unwarranted informal IC market in the country. We believe some people heavily misused the exchange facility to further this informal currency trade," said the source.

The central bank reached such conclusionafter its study showed unnatural surge in IC withdrawals through plastic cards in India. NRB reckons such withdrawals are finding their way into the informal market.

According to the study, Nepalis withdrew IC worth Rs 19.09 billion through plastic cards over the first five months of 2010/11. Withdrawal during the same period a year ago was worth just Rs 3.46 billion.

During the period, NRB had also injected additional Rs 50 billion worth of IC in the market, Rs 15 billion higher than what it had pumped into the market during the same period last year. Trade deficit had widened only marginally during the period.

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