Indian currency is widely used in Nepal for day-to-day transactions, especially in the border areas.
Nepal's central bank on Wednesday asked banking and other financial institutions in the country to immediately stop transacting in Indian currency notes of Rs 500 and Rs 1,000 denominations, a day after India demonetised them.
In a written directive to the financial institutions as well as currency exchange offices, the Nepal Rashtra Bank (NRB) said all business transactions in Indian currency notes having the denominations should be stopped with immediate effect.
The Nepal central bank further decided to write to the Reserve Bank of India for the management of the banknotes with higher denominations in Nepal, the Himalayan Times reported.
A limited use of Rs 500 Indian currency notes was allowed in Nepal in August 2015, after being prohibited since 2002.
The ban was imposed after several reports of counterfeiting.
India's ban on the currency notes previous day is likely to trouble traders in the border areas, who relied heavily on Indian currency because of their businesses and imports from India through the "open borders".
Indian currency is widely used in Nepal for day-to-day transactions, especially in the border areas.
Also, a large number of Nepalese citizens working in India send remittances to their families in Nepal in higher denomination notes.
Nepal, a landlocked country, depends on India for trade and supplies.