Rupee use in Bhutan to be banned
November 21, 2009: The Royal Monetary Authority (RMA) has decided to call back all the Indian currency currently in circulation in Bhutan market. According to the decision, the India currencies will no more be circulated in Bhutan as in past.
This is perhaps the strongest decision that the central money market regulator has taken in its history.
According to the RMA, the currencies will also be withdrawn other banks and financial institutions.
The decision is being taken to study the real status of import and export with India. With the rupee also a legal tender in Bhutan, it is difficult to study the actual trade status. After this, Ngultrum will only be the currency for legal tender in the country.
The RMA will provide Indian currencies to Bhutanese individuals on request and on production of invoice of good to be purchased from India. It will ensure that all import and export transactions are recorded.
The RMA does not have a system any record of how much of rupee is currently in circulation in Bhutan. It has the record of only how much is reserved with it. Last year, the bank faced shortage of rupee and had to take support from State Bank of India selling US$25 million.
However, withdrawing rupee from the market will not affect the convertible value with ngultrum. Ngultrum’s conversion with other international currencies is based on rupee conversion.
Possibilities are that with the banning of rupee in the market, a secondary market for currency exchange is likely to boom. The regular travel of people on India and Bhutan between these two countries will boost the exchange market, sometimes leading to illegal trade of currencies.
Rupee is generally used in southern district. The market mechanism will be deregulated and disturbed if locals from southern district need to travel to Thimphu to get rupee.
The RMA is taking the decision at a time when Bhutan is experiencing a severe rupee reserve crunch. As of March 2009, the RMA had a rupee reserve of Rs 1,978.9m which was only 21 days of import reserve, much short of the Constitutional provision that “a minimum foreign currency reserve that is adequate to meet the cost of not less than one year’s essential import must be maintained.”