And like high school boys, they even carry nicknames like Greenback (USD), Cable (GBP), Fiber (Euro), Loonie (Canadian Dollar), etc. If the currencies mentioned just before are the world-famous personalities, the Indian Rupee, Brazilian Real, Singapore Dollar and Malaysian Ringgit are deemed emerging personalities. In this volatile and sophisticated currency market, it would not be incorrect to say that Nepali Rupee has a petite personality and borrows all its traits from the big neighbor currency Indian Rupee.
The currencies gathered these personalities over the last 2,000 years since the first official use of paper money in China. Money was created as a medium of exchange since barter system could not satiate the needs of human beings and since then the medium of exchange that was created to buy-sell assets itself became an asset and people are now buying and selling currencies to make money out of it. This currency trading and speculation gave rise to the currency as a different asset class which was not the case thousands of years ago. It is through the evolution of world financial exchange system that trading in currencies and making money from thereon evolved, which eventually gave character and personality to the currencies. Let us understand this evolution process and where Nepali currency fits in this development.
During 1870s, gold standard system was used to base a currency’s exchange rate wherein the international value of currency was determined by its fixed relationship to gold. After World War I, the gold standard collapsed (1914) and during the inter-war period lasting until 1944, different systems of exchange rates prevailed. While the world economies were bickering over the exchange rate system, Nepal just began the process of creating its own money by establishing a mint in 1930 in Sundhara. During the same year, the gold standard was abandoned by all the nations, a starting point of the Great Depression (1930s–1940s). The breakdown of the world economic system necessitated a new economic framework and thus 45 nations came together in July 1944 and this started the Bretton Woods system (1946-1971) wherein most countries maintained fixed or pegged exchange rate for its currencies vis-à-vis the USD or gold and US government promised to redeem other countries’ USD for gold at a fixed rate of US$35 per ounce.
During that period, Nepali financial system was still in an infancy stage and only a year later in 1945 Sadar Mulukikhana was established to issue currency notes. It was only in 1956 that Nepal Rastra Bank was established and one of its immediate objective was to remove the dual currency system (INR and NPR) in Nepal and make Nepali Rupee the legal tender. As the confidence of people’s faith in the Nepali currency began to build, finally in 1967 NPR was made the legal currency in Nepal. This act and the pegging of NPR to INR in 1960 finally gave NPR its own identity albeit a juvenile one.
There is no denying that the Nepali currency continues to live in the shadows of the Indian currency and the valuation of the peg is more of a political decision rather than an economic one. From this perspective, if I had to describe NPR’s temperament per se, I would probably call it rigid and meek.
In 1971, US government abandoned gold convertibility aka Nixon Shock, which is probably the biggest turning point in the world’s financial exchange rate market. And since then currency values have floated in the currency market and strength of the currency depends on the economies of the respective country. This floating exchange rate regime (1971–till date) set the stage for today’s currency market allowing currency speculation to grow from 20 percent of the real underlying transaction in 1970s to the current 80 percent. Indeed, when Nixon took the dollar off the gold standard and started printing it freely as they wanted, calling it to be ‘dollar backed by the economy’, it was the starting point of the current currency crisis. This free convertibility allowed currencies to gather its own characteristics and traits. Meanwhile, Nepal adopted current account convertibility of the NPR (except for the INR) only during 1992/93 and this led to a birth of a new personality, though still amputated to earn its own characteristics by virtue of the fixed peg to Indian currency.
While the Nepali currency has remained ‘partially’ isolated – the benefits and downside of which can be argued upon – the world currency market has grown exponentially supported by technology and legal deregulation. Availability of trading though internet has taken it to a whole new level and anyone can participate in the Forex market and buy/sale any (convertible) currency holding as little as US$1,000. The FX market has become so sophisticated that it even preempts subtle hints from the market giving the currencies more refined and dynamic personality. The current ongoing currency war is going to have further impact on the current equilibrium with some pundits claiming that USD may not be the world’s reserve currency going forward.
Perhaps, the next milestone for the Nepali currency will be full convertibility, which will expose the till-now-managed currency to the volatility of the market forces. Occasional voices have been raised for allowing Nepalis for cross border investments, which will eventually pave a path for full convertibility. Though this is not expected to happen in the near future, it will be a reason for thought if India starts reconsidering its full convertibility option. There is no denying that the Nepali currency continues to live in the shadows of the Indian currency and the valuation of the peg is more of a political decision rather than an economic one. From this perspective, if I had to describe NPR’s temperament per se, I would probably call it rigid and meek. The readers are free to disagree with me – after all it is the disagreement of opinion that drives the Forex market forward.
michael.siddhi@bmibank.com
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