The central bank had used Basket System and forward Exchange Rate System to safeguard the business community by controlling the exchange rate fluctuation of foreign currency. Earlier the Nepalese rupee had a fixed exchange rate with USD and INR, but the exchange rate between USD and INR was in float. Hence the rate between INR and USD fluctuated every day. Major international trade depends with India so the Indian rupee is also of crucial importance for the Nepalese economy. So, Nepal had to follow a twin track policy. On one hand the Indian rupee had a fixed exchange rate and on the other hand similar fixed exchange rate with USD was observed. Hence it can be understood how important it was to maintain the cress rates between NPR, INR and USD. Any significant divergence in this regard could have a serious repercussion for the economy.
This double party exchange rate was possible only in the situation that INR and USD had a fixed exchange rate or if there was very little change. It was very difficult for Indian rupee to maintain stability and as a result significant degree of broken cross rates between INR and USD and NPR emerged time to time. The only solution for this problem was to maintain fixed parity either with INR or USD only.
For
the rectification of the problem Basket System was introduced under which the
party of USD to NPR also started to float on a daily basis. Under this system
the exchange rate of USD was arrived at first and then the rates of all other
convertible currencies were subsequently determined. For determining the
exchange rate of USD a basket was fixed. All currencies which were significant
for the economy were included in the basket. The movement of exchange rates of
these currencies in the international forex market used to influence the basket
rate.
The central bank never published the composition of the basket nor the weight assigned to each component but it was obvious that the Indian rupees must have had an overwhelming weight in the basket. Due to the nature and structure of Indian and Nepalese economy and the prevailing inflation rate in both the countries, this policy did not have any other alternative.
The central bank never published the composition of the basket nor the weight assigned to each component but it was obvious that the Indian rupees must have had an overwhelming weight in the basket. Due to the nature and structure of Indian and Nepalese economy and the prevailing inflation rate in both the countries, this policy did not have any other alternative.
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