FAQ

Could Bhutan break or change its rupee peg?

In theory yes; in practice it is locked in by economics, not by treaty. No clause of the India–Bhutan Friendship Treaty requires the 1:1 ngultrum–rupee parity — it is a monetary-regime choice the Royal Monetary Authority could change. But roughly 80% of Bhutan's trade, about two-thirds of its external debt and over half its consumer-price basket are rupee-denominated, so a US-dollar peg, a basket peg or a free float would each import volatility a tiny, thin-market economy cannot absorb. The IMF's 2025 review endorses the peg as an effective anchor while naming its real cost: Bhutan gives up independent monetary policy.

The peg has held at 1:1 since the ngultrum was first issued in 1974. What keeps it there is not a treaty clause — the 2007 treaty covers peace, trade and equal justice, with no currency parity — but the structural reality that Bhutan’s economy runs on rupees, backed by RBI swap lines (about USD 400 million) and standby credit facilities.

None of the alternatives dominates:

US-dollar peg — would expose Bhutan’s overwhelmingly rupee-denominated trade (hydropower receipts, fuel, food) to rupee–dollar swings it cannot hedge at scale.
Basket peg — needs an FX-trading capacity the RMA does not have, and trade-weighted it would still be about 80% rupee: a peg with extra steps.
Free float — the ngultrum market is paper-thin. Sri Lanka 2022 is the warning: a managed rate near 200 to the dollar blew out to about 360 in two months, followed by sovereign default.

The move short of breaking it. In the Common Monetary Area (South Africa with Lesotho, Namibia and Eswatini), the anchor country pays its small partners explicit compensation for its currency circulating in their economies. Bhutan receives no such compensation for the rupees circulating inside Bhutan — a renegotiation it could pursue without touching the peg at all.

The peg as quietly ceded sovereignty is Paradox #24; the uncompensated money-printing profit is Paradox #61 and Paradox #62. See also is the ngultrum pegged? and does Bhutan get paid for the rupee peg?

Primary sources