What If the Nepali Rupee and Indian Rupee Are No Longer Pegged?

What If the Nepali Rupee and Indian Rupee Are No Longer Pegged?

Aug 5, 2025

By Nepse Alpha

By Rohan Maharjan & Simran Sainju , SAIM College

The relationship between India and Nepal goes far beyond that of ordinary neighbors, it is more like that of brothers, bound by shared history, culture, and deep-rooted ties. The open border between the two nations is a rare example of trust and cooperation in the South Asian region, allowing citizens to move freely across boundaries without visas or passports. But apart from these visible links, there’s another important connection that doesn’t get much attention: the currency peg. Since 1993, the Nepalese Rupee (NPR) has been fixed at 1.60 for every 1 Indian Rupee (INR). This means the value of Nepal’s currency is closely tied to India’s. It’s a system that helps maintain stability in Nepal’s economy.

Still, it’s worth asking what if this peg didn’t exist? What would happen if Nepal decided to remove the Indian Rupee as its anchor? This question opens up a lot of discussion about the possible risks and benefits for the country’s economy.

Why Does the Peg Exist?

Before understanding the reasons behind Nepal’s current currency peg, it's important to take a look back at the historical journey that shaped it. Between 1857 and 1930, the Nepalese Rupee was fixed at a rate of 1.28 per Indian Rupee. However, in the decades that followed, the value of the Nepali currency saw multiple fluctuations.

During World War II, the exchange rate shifted dramatically, falling to NPR 1.6 = INR 1 at one point, and rising to as much as NPR 0.6 = INR 1. In 1952, the government of Nepal made an official move to peg the Nepalese rupee at 1.28 per Indian Rupee once again. This was followed by a series of minor revaluations between 1955 and 1957, where the rate gradually appreciated from NPR 1.755 = INR 1 to NPR 1.305 = INR 1.

In 1960, a hard peg was introduced at NPR 1.60 = INR 1. But due to the devaluation of the Indian Rupee in June 1966, the rate was revised again to NPR 1.0155 = INR 1. Between 1967 and 1975, Nepal moved to a more complex system, linking its currency not just to the Indian Rupee, but also to the US dollar and gold. During this period, the rates stood at NPR 1.35 = INR 1, NPR 10.125 = USD 1, and 1 NPR = 0.08777 grams of gold.

By 1978, with the collapse of the gold standard following US President Nixon's policy decisions, Nepal’s rates had shifted once more—NPR 1.39075 = INR 1, NPR 12.50 = USD 1, and 1 NPR equating to 0.0808408 grams of gold.

In 1983, Nepal adopted a new approach by anchoring the Nepali rupee to a trade-weighted basket of currencies. However, in practice, this continued to function as a hard peg with the Indian Rupee. Finally, in 1993, the government made it official, fixing the exchange rate at NPR 1.60 = INR 1, a peg that still remains in place today.

For decades, the currency peg has played a key role in maintaining economic stability in Nepal. Since India is Nepal’s biggest trading partner and one of the main sources of remittances, linking the Nepalese Rupee (NPR) to the Indian Rupee (INR) has made trade smoother and more predictable. It also helps control inflation and supports cross-border economic activities by reducing currency-related risks for businesses and workers. But the question comes in mind is what could happen if the peg breaks?

What Could Happen if the Peg Breaks?

1. Effect on Remittances

Many Nepalis work in India and regularly send money back home to support their families. Thanks to the fixed exchange rate, the amount their families receive stays steady and reliable. But if this peg were removed and the Nepali rupee lost value against the Indian rupee, those remittances would suddenly be worth less. The same amount sent in Indian currency would convert to fewer rupees. That means families in Nepal could end up with much less in hand, even though their loved ones abroad are sending the same amount. This drop in remittance value could create real challenges for many households.

2. Exchange Rate Uncertainty:

If the Nepalese rupee wasn’t tied to the Indian currency, its value would be decided purely by how much demand and supply there is in the global currency market. This kind of floating exchange rate can be unpredictable it might go up or down suddenly. And if the rupee weakens, it would mean paying more for things we rely on every day, like fuel, medicines, or building materials which we mostly buy from India. In simple terms, everything would start costing more, and that would hit people’s daily lives pretty hard.

3. Impact on Trade & Domestic Producers

Businesses that rely on cross-border trade or heavily import goods from India could see their profits shrink if the exchange rate starts fluctuating. Unpredictable pricing would make it harder for them to stay competitive or plan long-term.

On the other hand, some experts believe that the fixed exchange rate between the Indian and Nepali rupee actually puts Nepali producers at a disadvantage. Since Indian goods stay relatively cheaper, local manufacturers struggle to compete both in terms of price and market share.

4. Trade Disruption

History has shown that even small changes in the exchange rate can have big consequences. For instance, when there was an attempt to fix the rate at 101 NPR to 100 INR in the past, it triggered a strong reaction from India. Imports from Nepal slowed down sharply, affecting key export sectors like agriculture and timber. The impact was so serious that the policy had to be rolled back. It served as a clear reminder that even slight adjustments can disrupt trade relationships and hurt local industries.

5. Disruption to Cross-Border Supply Chains

A large number of Nepali industries depend on raw materials, equipment, or services that come from India. These supply chains are tightly connected—and even small changes in currency value can throw them off balance. If the exchange rate starts fluctuating wildly, it could lead to broken contracts, shipment delays, and rising costs for manufacturers and service providers alike. In the end, this would affect everything from factory production to retail prices, creating ripple effects across the economy.

6. Challenges in Managing External Debt

Nepal’s external debt is mostly borrowed in foreign currencies like the US dollar and Indian rupee. If the Nepali rupee weakens, it would take more NPR to repay the same amount of foreign debt. This puts added strain on the government’s finances and can eat into the country’s foreign exchange reserves. Over time, managing this growing cost could become a serious challenge for Nepal’s economic stability.