The Nepal Rashtra Bank has declared that use and exchange of new Indian currency notes – Rs 500 and Rs 2,000 issued by the RBI as ‘unauthorised and illegal’ in the country.
The Bank said that the new Indian notes, which have appeared in border areas dues to the open border, cannot be exchanged until India accords approval.
Ramu Poudel, chief of the NRB's eastern region, told members of business community in Biratnagar that the new Indian rupee notes in Nepal will be considered as ‘illegal’ until new facilities of exchange are determined by India’s Reserve Bank of India.
As of now, said Poudel, the understanding with RBI is that a Nepali citizen can hold up to Rs 25,000 worth of old Rs 500 and Rs 1,000 denomination Indian currency notes.
"Even the fate of those old notes is uncertain... how can these new Indian notes coming into the market be considered as legal?" Poudel said.
Nepal and India have not yet reached any agreement on the modality of exchange of the withdrawn notes, and the new notes will be exchangeable in Nepal only after India's central bank issues a new FEMA notification under the Foreign Exchange Management Act, according to the NRB.
The FEMA notification allows foreign countries or nationals to hold on to a certain amount of Indian notes. At present, India has allowed Nepali citizens to individually hold Rs 25,000 in Indian currency.
Poudel said the two central banks were in close contact to ease the exchange facilities but no way out has been identified yet.
After India banned its old Rs 500 and 1,000 notes, Nepal's central bank had formed a task force to prepare a guideline for Indian currency exchange.
"The modality and guidelines has already been handed over to the Indian side for their consideration through the Indian Embassy," said Poudel, adding that India is cautious about providing exchange facilities to citizens of a foreign country, as it fears it could be used as "a clearing house" to convert counterfeit currency into legal tender.
The Nepal Rastra Bank has said that the country’s financial system holds Rs 500 and Rs 1,000 notes worth Indian Rs 33.6 million. This amount includes cash in bank vaults, financial institutions and the central bank. However, the actual amount is believed to be much higher.