Rupee slides to 3-month low against US dollar

 Rupee slides to 3-month low against US dollar (Kathmandu Post,2012-04-25)

The Nepali rupee plummeted to a three-month low against the US dollar, with the Nepal Rastra Bank (NRB) setting the exchange rate at Rs 84.58 a dollar for Wednesday.

The lowest value for the domestic currency ever recorded was on December 16, 2011, when rupee was traded at Rs 86.37 per dollar. Since then, the currency gained value continuously until the first week of March and then started drifting downwards.

The fall of the rupee against the dollar is mainly due to the sharp devaluation of the Indian currency, with which the domestic currency is pegged.

Indian media have reported that India’s wide current account deficit, stalled financial reforms, and doubts about monetary easing have contributed to the drop in the rupee.

In last few months, the Reserve Bank of India (RBI) has intervened

in the foreign currency market to support the Indian currency. Latest data released by the Indian central bank on intervention showed it bought $1.1 billion and sold $1.4 billion in the spot market in the month of February.

Nepal Rastra Bank (NRB) officials said the depreciation of Nepali currency was good for the country’s exports, but imports from the third countries—other than India—will be costlier, with more domestic currency requiring to support the import bill. “As Nepal’s export basket is too small compared to imports, we can hardly benefit,” said NRB Deputy Governor Gopal Kafle. “But costlier third country imports, particularly petroleum products, will push inflation up.”

With imports from third countries accounting for around 33 percent of the total imports, the economy may face inflationary pressure. As of the last fiscal year, Nepal’s import from India stood at Rs 261.63 billion and those from third countries at Rs 133.27 billion. As Nepali industries import industrial raw materials from India by paying US dollars, they will have to bear additional burden.

However, rising number of migrant workers are likely to send more remittance when the Nepali currency is weak.

Nepal Electricity Authority has signed power purchase agreements with Bhotekeshi and Khimti hydropower projects in dollar terms. This means the power utility body will have to spend more to pay these projects. Nepal will also have to pay more while repaying its external loans.