Most Nepalis do not need to be told that Indian goods are cheaper. It is not an economic observation, it is a lived experience. But occasionally, something happens that makes the depth of this structural dependence impossible to ignore.
Take the recent domestic banana crisis. Nepal’s government restricted banana imports from India following the detection of Panama disease in farms across Kailali, Nawalparasi, and Chitwan. It was a reasonable call to protect domestic agriculture. Yet, the market response was swift and merciless. A dozen bananas that normally cost Rs. 120 to Rs. 150 shot up to Rs. 300 in Kathmandu’s retails almost overnight. And even then, farmers were receiving only Rs. 60 to Rs. 80 per dozen at the farm gate and the rest was swallowed entirely by the opportunistic middlemen. One restriction on one fruit, and the consumer market caved.
But that is a contained example. A far heavier memory lives in our collective psyche: the 2015 border blockade. For nearly five months, fuel trucks sat idle at the southern border, petrol was sold on the black market at five times its value, medicines ran short, and hospitals struggled to keep oxygen in stock. This economic strangulation arrived merely five months after an earthquake had already claimed close-to 9,000 lives, catching vulnerable citizens under tarps and tents as winter approached. For a Nepali, straining the relationship with India is never a theoretical abstraction, it is a memory with a heavy price tag.
This is the reality within which Nepal’s monetary policy operates. Since 1993, the Nepali Rupee (NPR) has been rigidly fixed/pegged to the Indian Rupee (INR) at 1.60. For over three decades, it has not moved.
The anchor we needed
Historically, the logic behind the peg was justifiable. Nepal is a small, landlocked economy whose trade is overwhelmingly dominated by a single neighbour. India accounts for over 60% of Nepal’s total trade; more than 80% of Nepal’s exports go south, and roughly 60% of imports come from India. With the trade deficit with India alone reaching Rs. 846 billion in the last fiscal year, fixing the exchange rate removed a massive layer of volatility. Businesses could price goods confidently, importers could forecast costs, Indian investors in infrastructure like hydropower did not have to worry about currency risk.
There is a macroeconomic layer too. Nepal’s foreign exchange reserves currently stand healthy enough to cover 18 months of expected imports. That cushion exists largely because the peg projects stability. Remittances, which consistently accounts for roughly 26% of Nepal’s GDP, flow predictably because families know their hard-earned money won’t lose value due to currency fluctuation on the journey home. And because the Nepal Rastra Bank effectively outsources the Reserve Bank of India’s monetary framework, Nepal essentially imports India’s inflation along with its goods. Removing the peg tomorrow, without the economic foundations to absorb the shock, would be reckless. That much is broadly established.
But something is off
Here is where it gets complicated. When a currency is fixed for over 30 years while both economies keep changing at different speeds, the rate eventually stops reflecting reality.
There is a detail worth understanding. Nepal’s rupee appears to float independently against the US dollar, or the euro. It does not. Nepali banks simply look at the global INR-USD rate and apply Nepal’s fixed NPR-INR (1.60) peg to calculate the day’s exchange rates. There is no independent, market-driven foreign exchange dynamic behind those numbers. In practice, the Indian rupee determines how the Nepali rupee moves across the entire world.
The structural consequence is severe. Over three decades, India’s productivity, industrial output, and global economy have skyrocketed; while Nepal’s has stagnated. This exchange rate has not moved to reflect any of that. The Nepali rupee is artificially strong, which now buys far more Indian goods than our actual economic productivity should. That is ‘overvaluation’ in practice. It means Indian goods consistently land cheaper in Nepali market than anything produced in Chitwan or Jhapa. The International Monetary Fund (IMF) has flagged this as well. It is a core reason why Nepal’s manufacturing sector has struggled to grow and why our trade deficit keeps widening despite years of policy attention.
By keeping the peg, Nepal also loses its most potent economic lever: independent monetary policy. An independent exchange rate allows a country to respond to slowdowns, while a weaker currency makes exports cheaper, stimulates domestic production, and cushions external shocks; Nepal cannot enjoy this luxury. Whatever economic cycle India absorbs or undergoes, Nepal absorbs automatically, on Indian terms and timelines.
When a government cannot adjust the exchange rate to protect the domestic industries, it inevitably reaches out for the next available tool: Tariffs. Nepal’s most recent attempt at this arrived in April 2026, when the newly formed Balen-government strictly enforced a pre-existing customs directive. The rule mandated that customs duties be levied on goods worth more than Rs. 100 brought across the border from India, even everyday items like spices, biscuits, and rice, to curb revenue leakage.
The protectionist instinct behind the policy was predictable. If the exchange rate makes Indian goods artificially cheap, doing it through import taxes seems like an easy and logical fix. But a tariff is not an exchange rate adjustment. A currency correction changes the underlying price signal for the entire economy at once, automatically and proportionally. While a tariff, by contrast, adds friction to daily life. It selectively picks a winner or loser, encouraging opportunities for smuggling, placing the Armed Police Force at border checkpoints inspecting local grocery bags.
The backlash was instant. Border crossings in some areas dropped by up to 70%. Nearly 50 rural markets in neighbouring Bihar recorded a sharp drop in sales, directly hurting Indian traders reliant on Nepali foot traffic. Within weeks, Nepal’s Supreme Court intervened, stating that enforcement must not prevent border residents from bringing in daily essentials or violate their constitutional right to dignity. The blunt instrument had failed, leaving the underlying distortion untouched.
This is no longer a debate confined to policy circles. The Rastriya Swatantra Party (RSP) formally included a review of the 1.60 peg in its 2026 election manifesto, a sign that a topic once considered too politically sensitive is now entering mainstream politics. With Nepal’s graduation from LDC status on horizon, and the bilateral diplomatic air chilled by the customs dispute and a postponed foreign secretary visit, the cost of standing still is becoming harder to ignore.
So what are the options?
The debate is not binary between “keeping the peg forever vs floating the currency and diving into the hyperinflationary chaos”. There are three credible paths, each with different trade-offs.
The simplest is a one-time rate reset, i.e., keeping the fixed exchange rate system but adjusting the rate upward from 1.60 to a more realistic 1.80 or higher. This would correct the misalignment that has accumulated over 30 years. While this would trigger an immediate and short-term inflation as imports become more expensive, it would instantly make domestic manufacturing and farming competitive. Paired with aggressive national campaigns to buy domestic products, like Prime Minister Balen Shah advertising local state-backed initiatives like DDC Cheese, it could recalibrate the economy without sacrificing the stability the peg provides for the economy.
A crawling peg, a hybrid approach goes further. Instead of keeping the currency frozen, the central bank adjusts the pegged value in a tiny, predictable, gradual, and transparent manner, based on the difference in inflation between Nepal and India. Rather than one correction, it builds in an ongoing mechanism so misalignments do not pile up silent for decades. Vietnam’s Dong is a functioning example, the rate stays anchored but is no longer frozen. Unlike a strictly fixed exchange rate (which never changes) or a free-floating rate (which moves entirely based on market supply and demand), a crawling peg offers a hybrid approach.
The most structural shift would be the currency basket, which is linking the Nepali rupee not solely to the Indian rupee but to a weighted mix that includes the US dollar and possibly to the euro. This would decouple the NPR from the INR alone and link it to a weighted basket of currencies. The INR would still carry the largest weight, given the trade and geographical realities and dependency, but diversification cushions Nepal from shocks that originate in India. Kuwait and China manage their currencies this way. This option requires stronger institutional capacity at Nepal Rastra Bank and is a longer-term goal rather than an immediate step.
None of this comes painless. All require political will, careful communication, and policy groundwork. But as the customs duty episode demonstrated clearly, reaching for tariffs to compensate for an overvalued currency created new problems without solving the original one. Fixing the scale is wiser than adding a weight to it every time you need a reading.
Beyond notes and coins: The Digital Frontier
The India-Nepal financial relationship is evolving in one more direction that does not show up in traditional exchange rate tables. Following its roll-out in March 2024, Indian tourists in Nepal can scan a QR code and pay at restaurants, hospitals, and shops across the country, changing cross-border tourism. Over 67,000 Nepali merchants are now connected to the UPI system, and more than Rs. 1.6 billion was processed in the first year alone. For Indian visitors, it is seamless.
For Nepalis in India, the reverse does not exist yet. The rollout that would have allowed Nepalis to pay via QR code in India has repeatedly stalled over a disagreement about who absorbs the transaction commission that Nepali banks would need to charge, a regulatory delay, not a technological challenge. The result is a one-way street: India pays in Nepal, Nepal cannot pay in India, remaining bound to cash. As payments increasingly move off cash and into phones, a currency relationship that leaves this digital divide unaddressed is only solving half the problem. Any serious update to the Nepal-India financial relationship in the coming years will need to grapple with the digital layer, not just the exchange rate on a board.
Way forward
The 1.60 peg was not a mistake. For a country in Nepal’s position in 1993, it was a vital call, and it has served a real purpose with price stability. But a number held unchanged for over 30 years, while both economies transform around it, is no longer just policy. It is inertia.
Taxing bags of groceries at the border is a symptom of a country realising that its currency is broken but is lacking the tools to fix it. The anchor that once kept Nepali ships steady in rough waters is now preventing it from sailing forward. The conversation has finally started, what remains is the political will to take it seriously, before the next shock makes the cost of standing still unaffordable for us.
