IMAGE: SHUTTERSTOCK
EVERY MORNING the Nepal Rastra Bank publishes an exchange rate for the Indian rupee and a non-negotiable instruction to the market: one Indian rupee equals 1.6 Nepali rupees. It has published the same rate since the mid-1990s. Governments have fallen, earthquakes have struck, a monarchy has ended and the exchange rate has not moved. For India—the source of some 56% of Nepal’s imports and the destination of 82% or so of its exports—this predictability is the entire point. For an investor from anywhere else, it is where the problem begins.
Nepal’s FDI inflow fell to $57m in 2024, down from $185m in 2019—a decline of 69% in five years, according to the UNCTAD World Investment Report 2025. The absolute number is small enough to qualify as statistical noise in a large economy; for Nepal, a country that had been scheduled for graduation from least-developed-country status in November 2026 and has since formally requested a further deferral to 2029, it is a failure. What explains it is a combination of factors the peg ties together: limited monetary independence, an absence of hedging instruments as well as a currency whose trajectory the government in Kathmandu does not control.
The mechanics are plain enough. Because the Nepali rupee is fixed to the Indian rupee, it depreciates against every other currency at India’s pace. The Nepali rupee stood at roughly 68 per dollar in January 2000. By April 2026 it had reached some 151. The Indian rupee over the same period went from roughly 43 to 85 per dollar—slower but the direction is the same, and Nepal follows it automatically. By some estimates, the compound annual depreciation rate for the Nepali rupee against the dollar is 3.07% over the past 26 years—a total of 121.4%. For a 12-year hydropower project, the asset class Nepal most wants to attract, that rate implies an expected cumulative currency loss on foreign-currency debt of around 44% before any return on equity is counted.
Hydropower is where the peg’s cost is sharpest. Nepal has an economically viable hydropower potential of roughly 42,000 megawatts. It has installed around a bit less than 4,500 MW. The gap is one of the largest undeveloped clean-energy assets in Asia, and filling it requires foreign capital the country cannot generate domestically. The problem is that hydropower revenue accrues in Nepali rupees—from tariffs paid by the Nepal Electricity Authority—while debt raised from foreign lenders must be repaid in hard currency.
The Electricity Authority does sign some power purchase agreements in dollars, but only for the foreign-debt portion of a project’s financing and only for ten years or the loan term, whichever is shorter. Equity investors’ capital is fully exposed to the depreciating rupee throughout the project’s life. The World Bank noted in a 2019 assessment that this risk allocation “has not been seen elsewhere” and was unlikely to attract serious international lenders. A hedging regulation introduced in 2022 exists on paper but has not been applied: the government and potential counterparties have not agreed on a premium, and Nepal’s 300-plus smaller hydropower projects—those below 100 MW—are excluded from its scope in any case.
The disbursement data shows the same trend from a different angle. In fiscal year 2023-24, Nepal realised Rs8.40bn in actual foreign investment against committed flows of Rs61.90bn: a realisation rate of 13.57%. Across years for which the Investment Board has published data, over 84% of committed FDI has never arrived. Money pledged at investment summits does not convert into building sites.
Abandoning the peg is not a straightforward answer. The NRB’s adhesion to the Indian rate has imported the Reserve Bank of India’s inflation discipline by default. Nepal’s consumer price inflation is in check partly because India’s own prices are stable. Remittances from India—a significant bilateral flow—arrive without exchange-rate friction, a benefit for recipient households in border communities and the hills. The country’s gross foreign exchange reserves reached $23.55bn in mid-April, enough to cover merchandise and services imports for 18.4 months according to the NRB. The open border with India—over 1,700 kilometres and lightly policed—means that any material divergence from Indian rates would trigger immediate capital flows in both directions, since rupees of both countries circulate freely in border communities.
The Mundell-Fleming trilemma holds that a country cannot simultaneously maintain a fixed exchange rate, free capital movement and an independent monetary policy. Nepal has the first two, by choice and by geography. During the pandemic the NRB sought to cut interest rates to stimulate a faltering economy but was constrained: aggressive cuts risked capital outflows into India and peg collapse. The central bank waited for the Reserve Bank of India to move first. In practice Nepal’s monetary policy is set in Mumbai.
The reserves are real but their origin matters. The $23.55bn has been built overwhelmingly on remittances from workers in the Gulf and India, not on export earnings or investment income. A reserve built on labour exports does not change the arithmetic facing an investor who borrows in dollars, builds in Nepal, earns in rupees and pays interest in dollars every quarter.
Nepal would need some $20bn in annual foreign investment to reach middle-income status on any plausible timeline, according to economists. In 2024 it received $57m. The peg was the right policy in the early 1990s, when it arrested a balance-of-payments crisis and anchored expectations in a fragile economy. Whether it remains the right policy three decades later is a question Nepal has not yet been willing to ask officially, while investors have been answering it with their portfolios for years. ■
