NPR devalued by 7.69% against USD; exploring its causes & effects on Nepal’s economy & stock market

Nepalese Rupee’s (NPR) exchange rate is devalued by 7.69% against United States Dollar (USD) in last five months, and in last one month, it has depreciated by 4.91% to Rs 109.66.

The graph below shows exchange rates of NPR against USD in the last five months.

What causes NPR value to devaluate?

Government is spending in excess of revenue by borrowing rather than from taxation and most importantly, the dollar demand is increasing which raised its value to zenith. Rising value of dollar raises remittance amount entering Nepal from abroad, which increases money supply in the country and lowers our currency value. Nepal majorly depends on its imports, and with the increased dollar value, cost of import increases, supporting further devaluation of NPR.

Apart from that, US had cut off all the economic and political ties with Iran this month. US President Donald Trump has said that he will strongly impose a sanction on countries that help Iran obtain nuclear weapons. Recently, he has also threatened to ban European companies that continued their business with Iran. Experts have predicted that after the US sanction on Iran, global oil price can increase by 10.50%.

As Iran is the second largest oil exporter to India, Nepal will also have a major impact by the news. General public have already been affected by day to day growing oil prices. Increased oil price weakens the currency value, thus swelling the cost of different commodities which increases the rate of inflation and cost of living. Devaluation of currency by large margin of 7.69% will have a negative effect on stock market as well as on economy and its effects can be severe in case of developing countries like Nepal.

Nepal Rastra Bank (NRB) is taking different measures to stabilize the NPR value that includes issuance of different types of bonds that suck money from public, due to which currency flow in the domestic market will decrease. With the decreased cash flow, currency supply will reduce and helps currency gain value.