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Updated: Nov 24, 2016 20:29 IST

At a time when Nepalese citizens are facing problems in exchanging withdrawn Indian notes of Rs 500 and Rs 1,000 denomination, the country’s central bank on Thursday banned the exchange of India’s new Rs 500 and Rs 2,000 currency notes.

The Nepal Rastra Bank said the new Indian notes cannot be exchanged until the Reserve Bank of India (RBI) issues a new notification under the Foreign Exchange Management Act. Such a notification allows citizens of foreign countries to hold a certain amount in Indian currency, officials said.

Ramu Poudel, the Nepal Rastra Bank’s chief for the eastern region, told members of the business community in Biratnagar that the new Indian rupees are considered “ illegal” and cannot be exchanged until new arrangements are made by the Indian side.

“As of now, our understanding with the Reserve Bank of India is that a Nepali citizen can hold up to Indian Rs 25,000 (in the) old Rs 500 and Rs 1,000 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.

Indian currency is widely accepted in Nepal, where many people have been facing problems in exchanging the old Rs 500 and Rs 1,000 notes. Due to the open border between the two countries, the new Indian notes too have entered areas along the border with India.

Nepal and India are yet to reach an agreement on modalities for the exchange of the withdrawn notes held by Nepalese citizens. Poudel said the two central banks are in close contacts to address this issue but no way out has been found as yet.

The Nepal Rastra Bank set up a task force to prepare guidelines for exchanging the withdrawn Indian currency notes. It handed over some guidelines to the Indian side through the Indian embassy of Kathmandu. Officials said the Nepalese side had suggested that authorities could collect the withdrawn Rs 500 and Rs 1,000 notes from Nepalese citizens and send them to the RBI for verification and exchange into Nepali currency.

Nepal’s central bank has also made it clear it will not provide over-the-counter exchange facilities to Nepalese citizens holding the withdrawn Indian currency because it lacks the expertise and technology to identify counterfeit currency.

Experts said India is cautious about providing exchange facilities to citizens of a foreign country as it fears it could be misused as “ a clearing house” to convert counterfeit currency.

The Nepali side also suggested that Nepalese citizens would have to open accounts at banks and financial institutions and deposit the demonetised Indian currency to receive the equivalent amount directly in their accounts.

Prime Minister Pushpa Kamal Dahal “Prachanda” and finance minister Krishna Bahadur Mahara have already urged their Indian counterparts to arrange exchange facilities for Nepalese citizens.

The Nepal Rastra Bank has said 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.