With over 74% of Bhutan’s trade taking place with India, ample holdings of Indian rupee reserves are
critical for trade, a lot of which includes importing essential food items from India. In addition to trade,
much of Bhutan’s public debt, and even private consumption debt for Indian sourced consumption
goods—which has been growing along with rapid economic growth—is denominated in rupees.
Servicing this debt thus also necessitates rapid conversion of ngultrum to rupees. In 2011, these
combined pressures on rupee holdings extended to levels unable to be matched by official rupee
holdings, resulting in what has come to be known as the liquidity or rupee crisis. This paper analyzes
the causes and cures of the Indian rupee crisis and finds that excessive monetary growth, inflation
differentials between India and Bhutan, and terms of trade imbalances were key factors in the
Bhutanese liquidity crisis. It provides recommendations for the ongoing management of rupee reserve
holdings.