The geographical characteristic of the country has resulted in a mutual relationship between Nepal and India, with shared cultural heritage and close economic relationship that dates to thousands of years. The north outlined with the restrictive Himalayan ranges, whereas the south is surrounded by an open plain terrain stretching across east to west causing greater Indian influence compared to Chinese influence. Nepal is located between the two countries, India and China. With increasing globalization and global trade, a convenient exchange rate policy is needed to allow countries to convert their currency to another currency to conduct smooth international trade. The exchange rate system is a critical macroeconomic policy issue, especially for small open economies like Nepal. The exchange rate system, also known as the current system, establishes the value of a nation’s currency against the currency of another nation.
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