The pegged exchange rate arrangement with the Indian Rupee (INR) since 1974 has served Bhutan well in terms of building confidence in the domestic currency, reducing trade uncertainty, anchoring price stability, promoting investment, and also cushioning the impact of exchange rate shocks on debt burden, particularly the INR debt.
Since May through mid-July 2025, the INR remained relatively stable, trading around 85 per USD despite persistent global trade and geopolitical tensions. However, beginning mid-July, the INR fluctuated within the range of INR 85.8 to INR 88.8 per USD. This depreciation was largely influenced by portfolio outflows, higher US tariff rates on Indian exports, and narrowing interest rate differentials.
The INR touched a low of 88.8 on 30th September 2025, ahead of the Reserve Bank of India’s (RBI) rate cut policy. During this period, the RBI intervened in the markets to prevent more significant declines in the rupee’s value. In July, the RBI was active in the market through state-owned banks and sold USD 2.5 billion to stabilize the rupee, marking the first month in over 11 years without any dollar purchases. The last time RBI did not buy dollars was in February 2014. This policy intervention helped restore confidence and prevented the rupee from breaching the 88.8 mark.
The Nu has been unvaryingly hovering around the USD 80 mark since the third quarter of 2022. However, over the review period, the Nu has gradually depreciated from Nu 80.3 per USD in September 2024 to Nu 87.3 per USD in September 2025, recording an all-time low. Given the peg arrangement between Nu and INR, movements in the Nu largely mirror the trends of the INR against the USD.
The Nu exhibited sharp exchange rate volatility during 2020, 2022, and 2025, largely influenced by external shocks such as the COVID-19 pandemic, the Russia-Ukraine conflict, which led to higher global commodity and crude oil prices, and monetary tightening by the US Federal Reserve.
“The depreciation of the Nu directly influences Bhutan’s trade balance. Generally, a weaker currency makes imports more expensive and exports relatively cheaper, boosting export competitiveness,” the Royal Monetary Authority’s (RMA) annual report 2025 highlighted.
However, Bhutan’s trade dynamics are distinct because of its close economic integration with India, which accounts for around 80% of the country’s total trade, including hydropower exports. As a result, depreciation of the Nu does not result in an improved trade balance. Nevertheless, fluctuations in the exchange rate have a significant impact on Bhutan’s external debt position, particularly for liabilities denominated in convertible currency (CC).
External borrowing continues to remain the major source of financing for Bhutan’s development activities, and it has been increasing gradually over the years. As of June 2025, Bhutan’s external debt stood at USD 3,635.2 million (Nu 310,969.2 million), accounting for approximately 102.8% of GDP. Of the total external debt, 68.6% was denominated in INR debt, while 31.4% accounted for CC debt.
The INR-denominated debt largely corresponds to hydropower project developments, accounting for more than 74.2% of the total INR debt, and is self-liquidating in nature. The peg arrangement, coupled with the large share of total debt denominated in INR, has cushioned the burden on Bhutan’s external debt from exchange rate fluctuations.
On the other hand, the CC debt amounting to USD 1,142.9 million is concessional loans from multilateral and bilateral partners that are subject to exchange rate risk, impacting both the stocks and debt servicing. The depreciation of the Nu from 83.5 in June 2024 to 85.5 in June 2025 resulted in a notable increase in both the nominal value of CC debt stock and debt servicing.
In the first two quarters of 2025, the average CC debt stock and debt service in nominal values increased by Nu 4,859.7 million and Nu 52.2 million, respectively. However, a marginal appreciation of the Nu in the second quarter of 2025 relative to the first quarter led to a slight decline in the CC debt stock by Nu 81.3 million in the second quarter of 2025.
“With the growing exposure of the CC denominated liabilities to exchange rate fluctuations, maintaining adequate foreign exchange reserves remains crucial to meet external debt obligations on time,” the RMA noted.
Sangay Rabten
From Thimphu
