Nepal will continue to improve ties with China in a bid to "counterbalance" the influence of India, BMI Research said in its report.
The research firm said India-Nepal ties will remain "cool" despite Nepali Prime Minister's visit to India on February 19 following the partial resolution of the constitutional crisis.
"While Nepal will remain heavily dependent on India, Kathmandu will increasingly seek to improve ties with Beijing in a bid to counterbalance New Delhi and wean the country off its dependence on India," the Fitch Group company said.
It said that while India-Nepal ties have historically been extremely cordial, the constitutional crisis and the resulting economic blockade of goods into Nepal led to a significant "cooling" of bilateral ties.
"Despite the partial resolution of the constitutional crisis and Nepali Prime Minister Khadga Prasad Sharma Oli's visit to India on February 19, we expect bilateral ties to remain cool in the near future as both sides seek to gradually re-establish trust," it added.
Nepal has traditionally been under New Delhi's sphere of influence, with India providing the country with the bulk of its energy and military needs, it said, adding that India has also exerted considerable influence over Nepal's domestic politics.
India's influence was evident in the crisis which began on September 23 2015, where Nepal's Madhesi minorities protested that they had not been given sufficient representation in the country's new Constitution, it added.
"Given the close relationship between Nepal's Madhesi minorities and the Madhesis in neighbouring Indian states of Bihar and Uttar Pradesh, New Delhi has been inclined to support Nepali Madhesis in a bid to court Madhesi votes in both states," the report said.
Accordingly, Indian support for the Madhesi had led to speculation that New Delhi imposed an unofficial blockade at the Nepal-Indian border to cut off fuel supply so as to force Kathmandu to consider the demand of the ethnic minority group, it stated.
According to the research body, with Nepal importing almost all of its oil from India, the shortage of fuel led to the development of a black market and the gradual restoration of road links with China.
"Although Nepal does not fall within China's traditional sphere of influence, mounting tensions with India provide Beijing with an opportunity to strengthen relations along the shared border. Accordingly, China reopened its border with Nepal in Tibet amid mounting tension with India," it reasoned.
Further, the report said, considering India has remained one of Nepal's largest donors despite changes in the government, it is likely that New Delhi was using the reduction in aid to signal its displeasure with Kathmandu.
The firm sees China proceeding cautiously to avoid unnecessary tension with India as a result of moving into New Delhi's traditional sphere of influence.
