Nepal’s ban on India’s Rs 200, Rs 500 and Rs 2000 notes should not come as a surprise to India. It is also an opportunity for China to make Nepal shift gradually towards using the yuan instead of the Indian rupee. Yet to see Nepal’s decision as one driven by China and not its own national interests would be a gross misreading of the situation. The decision requires to be seen in the correct perspective by New Delhi for crafting an adequate response to what is clearly a challenge affecting millions of Nepalese, including in India.

In fact, it is surprising that Nepal’s demonetisation of high-value notes was so long in coming, i.e. more than two years after India demonetised notes of Rs 500 and Rs 1000. Nepal, like Bhutan, has always used and traded in Indian rupees. Simply because it was easier to do so. At the same time, long before Prime Minister Narendra Modi’s note ban, notes of Rs 500 and Rs 1000 were banned in Nepal. Most transactions were restricted to notes of Rs 100 and lesser value. More than the current ban, the actual surprise is that Nepal had allowed free use of the new notes of Rs 2000, Rs 500 and Rs 200 till recently though there were large sections, especially of business and trade, that did not accept these.

The reasons why Nepal let the high-value notes circulate for two years can only be speculated upon. One of the reasons is said to be that Nepal was negotiating exchange of the demonetised Rs 500 and Rs 1000 notes; and, that Nepal Rastra Bank reportedly holds over $1 billion worth of these erstwhile notes. Therefore, it did not reiterate the ban after demonetisation because it expected GoI to accommodate its interests. Recent economic upheavals in Nepal and India combined with political changes on both sides of the border had resulted in an erosion of confidence in the Indian currency. There was a marked decline in the usage of Indian money. And, pending political stability, Nepal did not want to worsen the economic situation by banning the newly issued Indian notes. That would have been unsettling for businessmen, traders, migrants, Nepalese workers in India, tourists and the millions of Nepalese who keep their savings in cash at home.

Earlier this year, Nepalese PM KP Sharma Oli had said that demonetisation hurt countries like Nepal and Bhutan where the Indian rupee is widely used. He had said that he would take this up with Indian leaders. Therefore, the speculation that Nepal’s ban on the new Indian notes is retaliation for India refusing to replace its stock of demonetised notes (of Rs 1000 and Rs 500) with new ones. It is undeniable that the Nepalese economy and people have lost billions of rupees, which they can scarce afford to, because of India’s demonetisation.

The ban on Indian notes of Rs 1000 and Rs 500, long before November 2016, has its origins in the rumour that most of the counterfeit Indian currency originates in Nepal – either produced there by anti-Indian elements or is transported from there across the porous Nepal-India border. Doubtless, Nepal was one of the places from where criminal elements would bring in fake currency of high value. But there was no basis for saying that Nepal is only place from where bulk of the counterfeit currency came. All that the rumour achieved was to make Nepal ban notes of Rs 500 and Rs 1000.

Regardless of the reasons, it is clear that demonetisation has demolished confidence in the Indian currency in the neighbourhood where the rupee was much valued especially as a savings instrument. India must respond without falling victim to conspiracy theories of the decision being an outcome of a Nepal-China plot.

India is Nepal’s largest trading partner and supplies bulk of Nepal’s essentials and consumer goods. India is also home to millions of Nepalese and the ‘Sarkar’ is paying pension to legions of Gorkha ex-servicemen. There is no way China can take the place of India vis-à-vis Nepal, and it is for India to reinforce its position and strengthen ties.

In the present case, India should help Nepal implement its decision and, at the same time, uphold the primacy of the Indian rupee. The first step in this direction is to enable the Nepalese (and Indian tourists going to Nepal, who are mostly from middle and lower income groups) to freely and easily exchange their high-value currency for Rs 100 notes.

Such actions will revive confidence in India and the Indian currency. That is a necessary condition for resolving the larger issue of dealing with cross-border movement of black money and counterfeit currency, which is at the root of Nepal’s demonetisation.

How New Delhi responds will decide whether Nepal is bound closer to India or pushed into China’s embrace.

Author is co-editor of the book State of Nepal