I see what you mean. Clearly, some of the formal trade in the hinterlands would have happened through USD. But there was also relative ease of movement across J&K and I have no doubt that a lot of direct trade was in INR. Lots of money changed hands through the kashmir routes and its quite likely that even some currency would have changed hands.We were trading in dollars with Pakistan. They still owe something to the tune of $500,000 for medical items they bought from us. I don't think INR was used to trade with Pakistan. Even if they did use INR will stay in Indian banks assuming one of their banks have accounts in their name. And I am for all trade being suspended as well. If that does makes them bleed then better off if there is no trade.
There are $2-$3 billion worth of imports stuck in their ports and letters of credit pending. If IMF deal goes through then it will unlock couple of billion dollars from other sources. But however, all these will be vanished within a fortnight as they have $6 billion to repay in the form of the external debt payments in the next couple of months.
Movement, trade and fake INR was a deadly synergistic combination, lack of all of these is what has made a significant impact.
I really hope the trade doesn't resume soon and let them bleed.