Monetary experts argue that if IC circulation in the domestic business transaction is more than 25 per cent of the total transactions, then it could create a potential risk for monetary policy. Money supply is one of the tools that the central monetary authority uses to play with inflation and interest rates. With increasing substitution of the local currency by the foreign currency, this tool becomes blunt. The use of Indian currency, which was prevalent only in the Terai belt adjoining India in the past, has now spread to other parts of the country as well, especially in the tourist cities like Pokhara and Kathmandu. With the increased flow of Indian tourists to Nepal during the last few years, which accounts about one-third of the total tourist arrivals, the circulation of Indian currency has been reinforced.
Indian currency enjoys open and unlimited convertibility in Nepal.
In some of the bordering towns, businessmen openly admit that they prefer Indian currency to Nepali currency. The low interest rate offered by the commercial banks on the deposit is another reason behind the surge of IC circulation. As a result, boarding Indian informal banks in recent years have attracted large volume of domestic capital by offering relatively higher interest rates and other attractive schemes. The mounting export to India in recent years, particularly after the entry of Indian multinational investment in Nepal, and after the signing of Nepal India Trade Treaty, is another influential factor for the rise in IC reserve with NRB, which has crossed Rs 8.27 billion during the first three months of the current year. But the expanding export of informal sector to India and huge remittances that Nepalese bring in to the country can be partially blamed for growing use of IC, he said.