5g Asarphi – Nepal

In 1974, Nepal's currency situation was fundamentally defined by its fixed exchange rate system and close economic ties with India. The Nepalese rupee (NPR) was pegged to the Indian rupee (INR) at a rate of 1:1.25, a parity established in 1960. This arrangement facilitated extensive cross-border trade but also meant Nepal's monetary policy was heavily influenced by India's economic conditions. The country operated a dual currency system, where the Indian rupee circulated freely alongside the Nepalese rupee, particularly in the southern Terai region, reflecting deep economic integration and a significant reliance on India for trade and transit.

Economically, the early 1970s were a period of planned development under Nepal's Fourth Five-Year Plan (1970-1975), which aimed for economic modernization. However, the currency peg and open border presented challenges for independent monetary management. Inflation in India, driven by the global oil crisis of 1973, easily transmitted into Nepal, eroding purchasing power. Furthermore, the fixed exchange rate sometimes failed to reflect the true economic fundamentals between the two currencies, leading to periodic concerns about currency smuggling and arbitrage.

Administratively, the Nepal Rastra Bank, the central bank, had limited tools to conduct an autonomous monetary policy. The system required maintaining sufficient foreign exchange reserves, largely in Indian rupees, to defend the peg. While this stability was beneficial for trade and investor confidence, it constrained Nepal's ability to use exchange rate adjustments as a tool to manage its own balance of payments. Thus, in 1974, the currency situation was one of managed stability but with inherent vulnerabilities to external shocks and a clear limitation on national monetary sovereignty.