New Delhi: On Wednesday morning, the residents of India’s neighbouring countries, such as Bhutan and Nepal, woke up to realise that they too were affected by Prime Minister Narendra Modi’s push to tackle black money and corruption in India. Officials from the central banks of Nepal and Bhutan, both of which hold significant amounts of Indian rupees, scrambled to contact their counterparts in the Reserve Bank of India (RBI) to get more details on how to tackle the circulation of the Rs 500 and Rs 1,000 notes that were suddenly rendered worthless.
Bhutan’s Central Bank even dispatched officials to the State Bank of India’s branch office on the Indo-Bhutan border to scout for lower denomination Indian currency notes to ensure that there was no shortage in cash for exchange over the counter.
Nepal and Bhutan are the only two countries which allow Indian travellers to carry up to Rs 25,000 in paper currency. Beginning last year, the RBI allowed Indians to carry this amount in denominations of Rs 500 and Rs 1000 notes as well, which has resulted in a large amount of these notes entering and being circulated through the two countries.
Speaking to the Wire, Bhutan’s finance secretary Nim Dorji said that Indian currency was used extensively in his country. “Indian rupees are very prevalent in Bhutan, not just because of the border trade, but due to the hydropower projects [being constructed by India].”
After Modi announced the move to demonetise Rs 500 and Rs 1,000 notes on Tuesday, Bhutanese authorities immediately activated their communication channels to figure out the impact this move would have on their nation.
“Our [central bank] governor had a very long conversation with your [RBI] governor and based on the discussion, we issued a notification later in the day,” Dorji told The Wire.
One of the key missions of Bhutan’s central bank, Royal Monetary Authority (RMA) is to maintain sufficient rupee reserves so as to guarantee free convertibility of the Ngultrum against the Indian Rupee (INR).
Bhutan has been rather sensitive about maintaining optimum reserves of Indian currency, following the rupee shortage of 2011-2012 which crippled its economy.
Compared to the RBI’s time frame for exchange, Bhutan’s RMA announced a shorter period for depositing the old notes into bank accounts. The grace period will only extend till December 15 so that RMA is able to surrender the withdrawn notes to India by December 30.
While no monetary limit has been imposed on the total amount of Rs 500 or Rs 1,000 notes that can be deposited to the Ngultrum account, a maximum value of Rs 50,000 has been set in cases where it can be established that someone did not comply with current Know Your Customer norms.
“We do not know exactly how much Indian currency of Rs 500 and Rs 1,000 is in circulation in Bhutan. We will get a better idea after the deadline to deposit their amount,” RMA Governor Dasho Penjore told The Wire over phone from Thimpu.
He, however, added that there would not be much of an impact on Indo-Bhutan trade, as the bulk of the transactions is through bank drafts or cheques, rather than in cash.
Indian rupees account for 30% of RMA’s international exchange reserves, amounting to about Rs 27 billion.
The RMA notification on November 9 also states, “Cash withdrawal from a bank account, over the counter will be restricted to Rs 10,000 per month, until further notice.”
Despite the low ceiling for exchange of the old high-denomination notes at Rs 10,000 per month, the RMA governor said that there were concerns that Bhutanese banks may run out of smaller value Indian rupee notes. “Yes, we were worried that we did no have enough [smaller denomination INR]. We sent people to the SBI at the border town to get more lower denomination rupees. But, even SBI said that they don’t have enough stock,” he said.
SBI will be the conduit for RMA to return the old Rs 500 and Rs 1,000 notes to RBI after December 15, Penjore added.
In Nepal, no transactions in Indian rupees
Meanwhile, Nepal has gone the other route and banned all financial transactions in Indian rupees after Modi’s announcement yesterday.
“There was discussion between the Nepal Rastra Bank (NRB) and the RBI. But, the NRB have decided to stop all transactions, till they get information on RBI that it will take back all the Indian currency that has been withdrawn,” said a Kathmandu-based diplomatic source.
Indian security sources believe Nepal is the main hub, used by the Pakistani spy agency, ISI, to funnel fake currency into the Indian market. Therefore, rendering these high denomination notes into value-less paper is expected to make a considerable dent in this racket.
According to the think-tank Nepal Economic Forum (NEF), the demonetisation will hit the border economy the hardest, with reports of panic among residents on the India-Nepal border trickling into the Nepali capital.
“With a majority of the Nepali population living near the India-Nepal border and reliant on cross-border transactions for [their] daily income, the sudden demonetisation will cast an air of uncertainty over them,” said an initial assessment prepared by NEF on Wednesday.
It observed that the border blockade had led to an accumulation of black money in Rs 500 and Rs 1,000 denominations. “With a majority of this still stashed, the demonetisation of the INR could lead to a push towards gold, as gold is considered a safe-haven. Hence, [a] rise in [the] demand and prices of gold is likely to occur”.
NEF chairman Sujeev Shakya told The Wire said that there was a “lot of uncertainty in terms of what people should do”. “I got a call from temple trustees on what they should do with their Indian rupee notes,” he said.
While it may not impact wealthy industrialists adversely, the overnight scrapping of the Rs 500 and Rs 1,000 would certainly affect small traders, migrant workers and border residents.
“The key issue is what is the modality that has been put in place. NRB cannot shove off its responsibility,” he said.
According to Kathmandu Post, RBI had sought information about the amount of high-denomination India rupee notes in circulation within Nepal. Nepal Rastra Bank responded that there was around Rs 35 billion in 500 and 100 rupee notes within the formal financial network.
(The story has been updated with comments from Bhutan’s Royal Monetary Authority Governor and Nepal’s Sujeev Shakya.)