India-Nepal currency deadlock has its roots in face-off over Madhesis

Nepal’s judgment to ban high-denomination Indian currency notes of Rs 2,000, Rs 500 and Rs 200 are connected to the Madhesi issue that had led to a major barrier of the India-Nepal border in 2015, taking the bilateral relationship to an all-time low.

India is “upset” with the fact that Nepal has not yet carried out the constitutional amendments that will include the interests of the Madhesis and other ethnic marginalized groups there, and is holding out on switching old demonetized notes till it does so.

According to the Nepalese government, currency notes worth around Rs 10 crore are still prevailing in the banking channels of both countries. The judgment by the Nepal Rastra Bank (NRB) last month is in response to India’s stand.

NRB’s conclusion has become a “sticking issue” between both countries and has the potential to burn up further.

This will not happen till the time Nepal resolves the Madhesi issue,” said a senior official involved in the conversations, who didn’t want to be identified.

How the Madhesi issue snowballed

The difficulty has its roots in India’s demand to give more representation to the ethnic Indian-origin community of the Madhesis, residing in Nepal’s Terai region, under the new Constitution of Nepal.

The issue dates back to 2015 when Nepal chose a new Constitution but failed to support the demands of the Madhesis, Tharus, and Janajatis. This led to a massive barrier of the Indo-Nepal border — the supply of quintessential items from India to the Himalayan nation got disrupted, leading to a humanitarian crisis. About 50 people lost their lives. Nepal criticized India for the debacle, and an anti-India sentiment rose in the country.

After demonetization in November 2016, India switched the old notes that were lying with the rest of its neighboring countries, especially Bhutan which also uses Indian currency, but not with Nepal, as it was trying to get Nepal to act on its demand.

The matter was discussed largely when Prime Minister Narendra Modi last visited Nepal in May 2018 and had a mutual meeting with his Nepali counterpart K.P. Sharma Oli.

Last month, Nepal’s foreign minister Pradip Kumar Gyawali and his Indian counterpart Sushma Swaraj met but declined to succeed at a solution on both the issues.

Gyawali had urged Swaraj to have the old Indian currency notes traded with the Nepalese Rupee. He had also commanded that the NRB and the RBI jointly issue a circular allowing the usage of new Indian currency notes in Nepal within a certain limit, according to sources.

The central bank of Nepal has disallowed the usage of all demonetized notes in Nepal. They have sent a communication to the RBI earlier this month regarding high denomination Indian currency notes. The matter is under examination by the concerned authorities in India,” Raveesh Kumar, spokesperson for the Ministry of External Affairs.

Rakesh Sood, a distinguished fellow at the Observer Research Foundation and India’s former ambassador to Nepal, has criticized the non-resolution of the thing.

Not resolving the matter related to the exchange of such a tiny amount reflects lack of focus on a significant bilateral relationship like Nepal, because then it allows irritants to fester,” he said.

Indian currency in Nepal

Interestingly, also in 2015, a year before demonetization, Prime Minister Modi had replaced an age-old policy and allowed Rs 500 and Rs 1,000 notes as legal tender to be brought to Nepal. He did this as part of his ‘Neighbourhood First’ policy. Previous to that, only Rs 100 notes were authorized to be carried to Nepal, with a cap of Rs 25,000, due to fears of counterfeiting.

But now, Indians moving to Nepal cannot ever carry Rs 25,000 in cash and have it replaced for Nepalese Rupees, as per the new Foreign Exchange Management directive by the NRB.

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