KATHMANDU, Feb 8: The value of the US dollar has soared to an all-time high against the Nepali rupee, reaching Rs 140.43 on Friday, with some money exchangers offering the rate well above Rs 141. This marks the highest exchange rate ever set by Nepal Rastra Bank (NRB), surpassing the previous high of Rs 139.80 on Tuesday. By Thursday, the rate had jumped to Rs 140.25, reflecting a sharp increase over the past few days.
But what’s behind this steep rise?
While the exchange rate between the US dollar and the Nepali rupee isn't directly linked to the latter's value, it’s influenced by the Indian currency. Nepal has pegged its currency to the Indian rupee at a fixed rate of 1 India rupee to 1 rupee and 60 paisa of Nepali rupee. Given that 70% of Nepal’s international trade is with India, this fixed peg has significantly contributed to help stabilize the local economy.
However, recent developments in India are having a ripple effect on Nepal’s exchange rate. The Indian rupee has hit a historic low against the US dollar, trading at IRs 87.77 on Friday, continuing a trend of depreciation. This weakens the Nepali rupee as well, which is indirectly tied to India’s currency.
The weakening of the Indian rupee is partly due to growing trade tensions between the US and major trade partners. Under President Donald Trump’s administration, the US has ramped up efforts to impose higher taxes on imports, which could affect countries like India.
Notably, India's exports to the US grew substantially in 2023, with goods exports surging 40% to $123 billion and services exports increasing by 22%. But with the looming threat of higher tariffs on Indian products, including steel, aluminum and pharmaceuticals, there’s uncertainty over how this will impact trade in the coming months.
In response, India has even started softening its trade policies, such as reducing customs duties on US-made Harley-Davidson motorcycles. However, with Trump’s announcement to impose hefty tariffs on imports from close nations like Canada and Mexico, there are fears that India will be no exception to Trump’s tariff decisions, even as Indian Prime Minister Narendra Modi is visiting the US next week. If that happens, it will cause further strain on the Indian currency — and, by extension, Nepal's rupee — is expected.
With the US dollar strengthening globally, experts predict that it could continue its upward trajectory. Some analysts speculate that the dollar could reach 100 Indian rupees in the next couple of years, reflecting a global trend of dollar dominance.
Over the past 14 years, the dollar has nearly doubled in value against the Indian rupee, increasing by about 5% annually. The Nepali rupee has also depreciated by almost 6% against the dollar over the past year, from Rs 132.72 to Rs 140.43.
But what does this sharp increase in the dollar’s value mean for Nepal?
The surge in the value of the US dollar brings mixed impacts for Nepal’s economy. While the cost of imports like fuel, machinery, and electronics will rise, leading to inflation and higher living expenses for Nepali households, Nepal’s export sector could see benefits, as Nepali products may become more affordable for foreign buyers. Tourism may also experience a boost due to the stronger dollar and remittances from Nepalis abroad could increase in value, enhancing household incomes. However, servicing foreign debt denominated in US dollars will become more expensive, adding pressure to the national budget. Here is how each of these sectors in Nepal is impacted due to the surge in the value of the US dollar.
Imported Goods and Inflation:
As the US dollar strengthens, imports priced in dollars — including fuel, machinery, and electronics — become costlier. This could lead to an increase in the price of essential goods, putting pressure on the cost of living for many Nepali households, especially those reliant on imported products.
Remittances:
On the flip side, Nepalis working abroad, particularly in the US, will see an increase in the value of remittances when converted to Nepali rupees. This could boost household income, especially for those relying on foreign earnings.
Exports:
For Nepal’s export sector, a stronger dollar could make Nepali products — such as handicrafts, garments, and agricultural goods — more affordable for foreign buyers. This may provide a much-needed boost to the country's export competitiveness.
Foreign Debt:
However, for Nepal, which holds foreign debt denominated in US dollars, servicing these loans will become more expensive. As the rupee weakens, the cost of repaying dollar-denominated loans increases, straining the national budget.
Tourism:
A stronger dollar could also make Nepal an attractive destination for US tourists, potentially boosting the hospitality and tourism sectors. However, the rise in the cost of living due to higher import prices could deter budget-conscious travelers.
Government Budgeting:
With rising import costs and inflation, the government may need to adjust its fiscal plans, particularly for projects relying on imports or foreign aid.
Thus, the surge in the US dollar is a double-edged sword for Nepal. While remittances and exports could benefit, the rising cost of imports and inflation could put significant pressure on local households. As Nepal navigates these challenges, the government will need to carefully manage its fiscal policies and economic strategies to mitigate the impact of this global trend.
With inputs from agencies