RBI’s INR Liberalization: Strategic Opportunity or Multi-Layered Risk for Nepal?

India’s recent amendment to its Foreign Exchange Management Rules, which allows individuals to carry high-denomination Indian Rupee notes (₹200 and ₹500) up to ₹25,000 across the Nepal–India border, has reignited a long-running debate in Nepal.

While the reform brings immediate comfort to travelers, traders, students, and medical patients, its deeper implications stretch far beyond convenience - touching national security, border market survival, counterfeit circulation, illegal migration pressures, demonetization exposure, election integrity, tourism revenue discipline, tax leakage, and long-term monetary sovereignty.

The Nepal Rastra Bank (NRB) has clarified that this new arrangement will not automatically apply in Nepal until it issues its own directive. That pause must now become more than procedural. It must serve as a national safeguard, giving the country time to think strategically before exposing itself to consequences that may take decades to reverse.

Border Economy: The First Casualty

Nepal’s border markets were already under severe strain even before this amendment. India’s reduced GST rates on electronics, garments, medicines, FMCG, and household goods have made Indian retail structurally cheaper than Nepali products. The result has been a steady migration of Nepali consumers across the border for routine purchases, draining local businesses, eroding VAT collection, and weakening employment in frontier towns. Easier access to physical INR cash will only accelerate this outflow. When consumers can legally carry ₹25,000 with ease, cross-border shopping becomes not just convenient, but habitual. Over time, this leads to declining sales of Nepali goods, persistent VAT and customs revenue leakage, growth of under-invoicing and informal trade, and gradual hollowing out of the Nepali border economy.

A weakened border economy does not just mean fewer shops, it means shrinking tax base, rising unemployment, and deeper dependence on imports. Once local production ecosystems collapse, rebuilding them becomes exponentially harder. 

Counterfeit Currency: A Persistent Security Threat

Fake Indian Currency Notes (FICN) remain a live national security threat for India, especially in higher denominations such as ₹500.  Despite technological upgrades, high-quality counterfeits continue to surface, often  linked to transnational criminal and terror-financing networks.

For Nepal, the risk is immediate and direct. The open border has historically been used as a transit and testing ground  for counterfeit notes. Traders, transport workers, pilgrims, and rural markets are especially vulnerable. For a small vendor, a single fake ₹500 note can wipe out a day’s earnings. Without real-time NRB–RBI intelligence sharing, serial number tracking, border enforcement training, and a dispute-resolution mechanism, Nepal risks absorbing India’s counterfeit pressures without any control over currency printing, distribution, or security design.

Counterfeit Crackdowns & Fatal Precedents in Nepal

A sensitive yet unavoidable dimension is the history of Indian intelligence–linked crackdowns inside Nepal, carried out under the pretext of dismantling counterfeit networks. In multiple incidents over the past decade, Nepali citizens were killed during operations widely believed to involve Indian intelligence or enforcement-linked units. These episodes raised unresolved questions about extra-territorial enforcement inside Nepal, violations of Nepal’s legal sovereignty, and a lack of transparency and judicial closure.

If INR circulation expands with higher-value notes, the likelihood of cross-border enforcement conflicts increases. Monetary crime then becomes the justification for security actions  that blur sovereignty. In such contexts, a currency decision is never just economic; it becomes geopolitical  and human.

Open Border & India’s Illegal Immigrant Pressures

India has intensified crackdowns on illegal migrants, particularly from Bangladesh and Myanmar. There are growing concerns that individuals apprehended inside India are being pushed across into Nepal due to the open border and weak biometric controls. When freer INR cash mobility intersects with unregulated migrant flows, it creates fertile ground for the expansion of shadow labor networks and cash-based underground economies. In such conditions, non-Nepali actors can easily exploit the circulation of Indian currency within Nepal. As a result, security concerns become intertwined with currency regulation which will further complicate enforcement.

Nepal risks becoming a buffer zone absorbing India’s internal displacement pressures, while also hosting a growing informal economy fuelled by foreign cash.

How Legal INR Can Quietly Weaken Nepal’s Revenue Base

While easier INR circulation may benefit Indian tourists, it also introduces structural vulnerability to Nepal’s tourism revenue discipline:

●  Pre-Travel Spending Leakage: Easier INR access allows tourists to book Indian flights, hotels, shopping, and medical services even before entering Nepal, reducing high-value domestic spending.

●  Dual-Pricing Distortion:  If hotels, taxis, trekking agencies, and tour operators begin quoting prices in INR, the NPR gradually weakens as the unit of account in key tourism hubs like Pokhara, Lumbini, Chitwan, and border resorts.

●  Tax & VAT Leakage: INR cash payments bypass formal electronic settlement systems, weakening tourism VAT compliance, undermining tax enforcement in tourism services, and eroding compliance with digital receipt requirements.

●  Hospitality Currency  Substitution: If wages, tips, and service contracts increasingly shift to INR, Nepal risks informal currency substitution in one of its most important export-earning sectors.

Thus, while travel convenience may improve, Nepal’s long-term tourism revenue discipline and NPR sovereignty could weaken if INR dominance spreads uncontrolled.

Demonetization Shock: Nepal Remains Exposed

2016-The First Major Shock: Nepal has already learned the hard way what unilateral Indian currency decisions can do. India’s sudden 2016 demonetization of ₹500 and ₹1,000 notes inflicted severe hardship on Nepal. Millions of Nepalis were left holding invalid banknotes with no guaranteed exchange window, no compensation mechanism, and no legal recourse.

2023-Withdrawal of ₹2,000 Note Renewed the Warning: On May 19, 2023,  India withdrew the ₹2,000 denomination banknotes from circulation. While still legal tender for a transitional window, this reinforced the truth that India can change banknote policy unilaterally and abruptly. For many Nepalis using ₹2,000 notes as a store of value, a cross-border settlement tool, and an emergency reserve, this was another reminder of systemic vulnerability.

Without a formal NRB–RBI demonetization protection protocol, Nepal remains exposed to repeated monetary shocks originating outside its control.

Impact on Nepal’s Currency Sovereignty

Greater circulation of ₹200 and ₹500 notes risks intensifying the informal INR-isation of Nepali economy, with evidence already visible in border pricing shifting to INR, wage settlements in logistics referencing INR, informal savings migrating to INR, and contracts and retail transactions increasingly  denominated in INR. Over time, this will weaken NRB’s control over interest rate or monetary transmission, erodes Nepal’s seigniorage income and associated government’s currency benefits, and undermines confidence in the NPR as the primary currency.

While Nepal pegs its currency to the INR, a peg is not a surrender. Unregulated Indian cash circulation inside Nepal, however, can gradually turn the peg into de facto INR dominance.

Deeper truth

Currency is not merely a medium of exchange; it is the living symbol of a nation’s unity, identity, and sovereignty. Through our currency, we communicate our collective pride not only to Nepali citizens but also to every visitor who steps onto our soil. In Nepal, the Nepali Rupee must enjoy full and unquestioned primacy within our territory - not as a technical rule alone, but as a declaration of national self-respect.

Ironically, Nepal today enjoys near-complete monetary dominance of the Nepali rupee largely due to India’s own regulatory decisions, not solely through the efforts of the Government of Nepal. This historical accident of policy has granted Nepal a rare and valuable monetary shield by default. Such a strategic advantage - earned without direct conflict - must never be surrendered lightly, casually, or at another nation’s whim.

What history has handed us as a boon through circumstance must now be protected deliberately through policy. Currency convenience must never be allowed to dilute national dignity, economic command, or sovereign authority. The monopoly of the Nepali Rupee within Nepal is not a technical preference - it is a sovereign right that must be defended with clarity, confidence, and conviction.

Cross-Border Labor Influx & Informal Trading Threat

Another serious concern is the possibility that unemployed populations from India’s northern border regions could enter Nepal legally under the open border system, carry up to ₹25,000 in cash, and immediately begin informal trading inside Nepal that may rapidly expand. This can lead to unregistered businesses operating in Nepali markets, price dumping and unfair competition against Nepali traders, tax evasion and the collapse of labor regulation, and expansion of shadow cash economies using INR inside Nepal.

Over time, these dynamics undermine domestic employment, threaten the survival of local businesses, and weaken Nepal’s fiscal discipline.

A Direct National Security Dimension When foreign cash mobility, election financing, informal trading, and open-border migration intersect, the issue is no longer just economic - it becomes a national security matter. Unchecked INR inflow during sensitive political periods  can disturb social stability, distort democratic processes, expand unmonitored economic networks, and weaken state authority in border districts.

Strategic Warning

Any foreign currency liberalization  without election-period controls, border cash surveillance, and coordinated intelligence monitoring creates a direct vulnerability to Nepal’s democratic and security architecture.

Why Cash Push prior to election? The Nepal Rastra Bank (NRB) already facilitates Indian Rupee access through formal banking channels, including bank cards, IC/NC exchange facility, digital payment platforms, and regulated cross-border settlement mechanisms.

This means that genuine INR needs for travel, education, medical treatment, and trade are already being met through traceable, auditable, and secure digital systems. However, many citizens, especially in border regions, remain either unaware of these legal digital options or INR needs are fulfilled through local traders.

NRB must, therefore, intensify public communication and financial-literacy outreach so that people do not unnecessarily rely on physical INR cash, informal money exchangers are avoided, and transaction security is strengthened.

Expanding physical cash at such a sensitive political time raises a blunt question. The Election Commission of Nepal needs to be alert and sensitive to the decision taken by the monetary authority. If digital INR already works, why expand physical cash now - especially before elections?

Standardized ATM Commission & Universal QR Access

To further reduce the need for physical INR cash, one strong policy solution  would be the introduction of fixed ATM Cash Withdrawal Commission Across. NRB and RBI should jointly agree on a uniform commission rate applicable to Nepali citizens withdrawing INR in India, and Indian citizens withdrawing NPR (or INR where applicable) in Nepal. Such standardization would eliminate arbitrary and exploitative bank charges, encourage the use of formal banking channels over cash smuggling, and improve transparency and customer confidence.

A second measure would be universal QR and card interoperability between Nepal and India. QR-based digital payments should be made fully interoperable between Nepal and India, and applicable to card holders and mobile wallets of both countries. This would enable Nepali cardholders to pay seamlessly in India, allow Indian visitors to make digital payments within Nepal, and ensure that hotels, taxis, shops, and hospitals can accept payments without handling physical cash.

The strategic benefits of this approach are substantial. If ATM commissions are standardized and QR/card interoperability is universal, dependence on physical INR cash will automatically decline, counterfeit risks will be reduced, election-period cash misuse will become more difficult, tourism revenue will be digitally traceable, and Nepal’s currency sovereignty will be better protected.

If digital INR is already legally available, expanding physical cash circulation  only enlarges security, election,  and sovereignty risks without adding real economic value.

Election Integrity

The new INR liberalization carries a particularly dangerous dimension during Nepal’s election cycles, especially in the Tarai and border districts where population movement, cash liquidity, and  political competition are already intense.

With the legal allowance  of ₹25,000 per individual, there is a real risk that large volumes of cash can be quietly distributed to voters, vote-buying operations can be scaled rapidly, and electoral outcomes can be financially manipulated in highly competitive and influential constituencies.

Unlike domestic cash, foreign-denominated INR is harder to trace, audit, and prosecute under Nepal’s election finance laws, creating a blind spot for the Election Commission, anti-money laundering units, and local security agencies.

This creates a dangerous scenario in which financial influence can travel faster than legal enforcement, posing a direct threat to democratic integrity.

The urgency to pause this INR policy amendment becomes even stronger given that the new Parliament will already be burdened with nation-defining structural and highly sensitive national decisions, including whether Nepal should move toward a directly elected Prime Minister or a presidential system or continue with the existing constitutional framework, a possible  re-look at provincial governance and federal restructuring, NRN voting rights, dual citizenship for NRNs, and broader questions of state design, inclusion, and long-term political stability.

These are constitutional choices that will define Nepal for generations. At such a moment, introducing a foreign-currency policy with deep implications for sovereignty, elections, security, and fiscal control would be reckless if rushed.

When the State itself is under redesign, monetary sovereignty must be guarded; not experimented with.

Parliamentary Debate Must Before Any Approval

Nepal today remains in a delicate and vulnerable national condition - economically, politically, and geopolitically. At such a sensitive juncture, any decision affecting the national currency, cross-border cash mobility, election security, and monetary sovereignty cannot be treated as a routine administrative adjustment.

Accordingly, the new INR cash amendment must not be unilaterally authorized by the Governor of Nepal Rastra Bank, the Finance Minister, or the Prime Minister alone. Such a far-reaching decision demands full democratic legitimacy.

This issue should therefore be formally tabled in the newly elected Parliament, subjected to open national debate, reviewed through multi-party consensus, and assessed simultaneously through national security, economic,  electoral,

and sovereignty lenses. Only after parliamentary scrutiny, independent expert testimony, security agency  assessments, and public consultation should Nepal determine whether, when, and under what strict conditions such currency liberalization may be allowed.

Strategic Democratic Principle

India is actively pursuing the globalization  of its currency through INR-based trade settlement, rupee Vostro accounts, and cross-border lending in INR. These developments carry mixed implications  for Nepal. On the positive side, these measures can lower transaction costs, reduce reliance on the US dollar for India-centric trade, and facilitate tourism and remittance flows. However, the risks are equally significant. These include imported inflation and external shocks, dependence on Indian capital market cycles, and a loss of domestic monetary flexibility. An advantage therefore is conditional and depends entirely on Nepal’s policy posture.

Nepal’s Strong Forex Reserve A Strategic Shield

A critical but often overlooked factor is Nepal’s strong foreign exchange reserve position, supported by high remittance inflows, growing hydropower exports to India, tourism recovery, and foreign grants and concessional loans. This strong reserve base provides Nepal import security, balance-of-payments resilience, and negotiation leverage. It also means Nepal is not compelled to rely on INR as a stabilizer. Nepal can - and must - preserve the NPR as the principal store of value, the unit of account, and the wage currency. With adequate forex backing, Nepal has both the right and the capacity to defend its monetary independence.

Lessons from Other Currency Zones Comparative international experience reinforces the need for caution.  In the South African Rand Monetary Area, neighboring states use the rand but under formal treaties that include crisis liquidity arrangements and seigniorage sharing. Nepal has none of these protections with India.

In fully dollarized economies such as Panama and Ecuador), macroeconomic stability increases, but monetary sovereignty disappears permanently. Nepal must avoid sliding into such an outcome unintentionally. Its current arrangement-pegged to INR but without formal protection mechanisms-requires stronger governance, not deeper reliance.

Final Assessment

The Reserve Bank of India’s high-denomination INR access reform  is not merely a matter of convenience. For Nepal, it intersects directly with national security, border market survival, counterfeit crime, migration  spillovers, fiscal leakage, election integrity and democratic risk, repeated demonetization exposure, and long-term currency and monetary sovereignty.

Strategic Bottom Line

Nepal is not economically weak; it does not need to surrender monetary space. Nepal must integrate with INR (not on direct market level) deliberately - not passively.  INR integration must be slow, conditional, and tightly governed. Assertive  currency governance, backed  by Nepal’s own strong forex reserves, is the key to protecting sovereignty. Currency convenience must never override national sovereignty.

(This opinion article was originally published in January 2026 issue of New Business Age magazine.)