Weak Indian Currency (IC) against US dollar pulled Nepali rupee to its historic low today.
Today, exchange rate of Nepali currency against US Dollars touched the highest of Rs 84.5 against a dollar on an average in the open market, according to exchange rate fixed by different commercial banks.
Indian currency with which Nepali currency is pegged had reached historic low yesterday at Indian Currency 52.78 per dollar. However, the Indian foreign exchange rate redeemed itself a little reaching IC 52.58 at around 11 in the morning.
Though, Nepal's financial conditions have nothing to do with the current depreciation of its currency, the fixed exchange rate regime with India has pulled Nepali currency along with it on the bitter-sweet downward ride making the imports from third country dearer.
For Nepal, the strong US dollar translates as expensive imports from third countries at the same time the dollar income — remittances and tourist incomes — from foreign countries will go up.
"The stronger dollar will be leading to higher inflow of remittance as most of the migrant workers are paid in dollars," economist Dr Chiranjibi Nepal said, "Depsite no change in salary of the workers, the receivers will be getting more here at home.The other advantage of having strong dollar is being paid more for the exports."
"Unfortunately for Nepal, merchandise and service export to third country is nominal so that the opportunity we have from having strong US dollars can not be well exploited," expressed Nepal. "On the other hand, imports from third country especially fuel and other capital equipments will become expensive. The Chinese merchandise had already started to become expensive resulting from stronger US dollars.
"Nepal imported goods worth Rs 133.27 billion paying in dollars from third countries in the last fiscal year along with the imports worth Rs 47.8 billion from India that has been paid in dollars. The expensive import might lead to further price rise as being observed in India.
Moreover, expensive dollar will also create difficulty in debt servicing. "The government target in the budget to repay debt and interest will shortfall, if the exchange rate keeps moving up," expressed Nepal.
This fiscal year's budget has designated Rs 20.3 billion for debt servicing at the estimated rate of Rs 85 a dollar to be safe. "But the dollar's rise above Rs 85 will hit the government coffer also," according to Finance Ministry.
The Indian currency has started to depreciate since last few months due to the withdrawal of foreign institutional investors from the Indian equity market. In India, foreign portfolio investors have bought equities worth $393 million so far this year while they had invested $29 billion last year.
Most of the foreign institutional investors are reallocating the funds to commodities and US securities as global economic outlook seem to be less cheerful in the coming days.
Dollar Exchange Rate (in Rs)
2007-11-18 — Rs 62.90
2009-03-11 — Rs 82.70
2010-05-03 — Rs 70.65
2011-11-22 — Rs 83.5
(Source: Nepal Rastra Bank)