I finally got around to reading this yesterday as my sister very kindly sent me her copy. If you're reading, thanks sis!
The first thing that came to mind in connection with the butterfly motif was Nabokov (obviously) - and there's even a 'cedar waxwing' on p. 28 to ensure that MZD can no longer pretend he hasn't read Pale Fire... But then I got to thinking along other lines.
It's fairly obvious that the story is constructed around/upon instances of cutting up and stitching together, and the term that balances these two operations is the butterfly. The butterfly is double: it intersects and it intervolves, it is both caesura and copula.
On a formal level: there is the intercutting of voices in the telling of the story, sutured into continuity. Then, the first and last lines balance each other: the first line 'cuts', the last line 'holds'. The story's wordplay relies on two main linguistic operations: the tmetic 'cut' ('insitrusive', 'fortipify', 'consecawence', colilusion'); and the portmanteau blend ('smoothgrooved', 'catchstitch', 'prickstitching'). Cut and stitch. It is surely no coincidence that the orphans' initials suggest 'tmesis' as well as TIMES (tmesis deriving from the Greek meaning to cut).
Thematically: when the basic motifs of the story (cutting up and stitching together) recur, the butterfly appears as a marker. First it marks the point of cutting (the token Belinda Kite gave to Pravat is the first cause of Chintana's pain) and, simultaneously, of a joining together (it was a love token). Then it is a kind of surgical tape to repair a cut (the surgeon 'Taped on a butterfly for good measure') and a reminder of the pain of betrayal that cuts apart ('And Chintana felt / something within / her part / like a wail. / Butterflying / hope and hold'). This plays off the meanings of the word 'butterfly' against each other, because in the first instance it suggests a surgical operation of joining together (and there is also such a thing as a 'butterfly stitch'); and in the second it suggests a culinary operation of splitting apart (the verb 'butterfly' being used there in the sense of to bisect, to slice apart). Images of cutting are throughout associated with the 'sharp-tongued' Belinda Kite, and images of sewing together with the seamstress Chintana - though not, of course exclusively. In fact the two motifs have a tendency to switch places, to stand for their opposite. After all, Belinda Kite stitched together the butterfly in love and Chintana cuts it up in anger.
The little allegory of the Storyteller's journey and encounter with the Man With No Arms obviously plays out Chintana's internal conflict and her desire for vengeance (the Storyteller stands for a kind of pure spirit of vengeance detached from reason or motive - the butterfly, the token of Chintana's resentment, having been removed from 'his' memory). Even here instances of coming apart and binding together come in pairs: in the Valley of Salt, there is a removal of self from self and then a fusion with his own shadow; in the Forest there is a sense of sounds fragmenting and then a sense of the simultaneity of sounds; in the Mountain there is a division and reduplication of selves but also a multiplication of his 'own solitude'. Everything takes place in a double movement of drawing apart and fusing together.
The Storyteller is a proleptic figure, whose lesson is of how violence begets violence and perpetuates itself. The Man With No Arms reminds that wounds inflicted on others are really self-inflicted. He has 'violet [eye]lashes', which recall Chintana's cut, the 'violet line' that marks her thumb. This wound stands for emotional pain and desire for viole[n]t retribution. It is no coincidence that it throbs whenever the Storyteller looks at her, since he manifests this desire for vengeance. The wound is self-inflicted and it prefigures the wound Belinda Kite will suffer - the loss of her hand. Again, the violent impulse of vengeance is both other-directed and self-directed, as if each wound must be inflicted on both parties. Belinda's loss of a hand is significant for another reason, too (and not least because it is unconsciously predicted by Chintana on p. 28), since it is the hand that first stitched the butterfly (and bled on it); Chintana's is the hand that cut the butterfly apart.
Chintana cuts into this cycle of harm (but does not necessarily break it; she merely holds it back) when she holds together Belinda Kite with that 'tiny stitch' of...? The unspoken word on p. 99 is surely 'forgiveness'. Not 'mercy', because Belinda Kite's affair with Pravat is earlier ironically called an act of mercy? On the other hand, mercy is not an entirely selfless impulse here, since Chintana is holding together herself (her pain) and Belinda in the same movement. So forgiveness is delicately balanced against pain that is still very much alive but 'held'. Retribution and forgiveness, inflicting and suffering, are shown to be two sides of the same token - and at the moment of forgiveness, Chintana symbolically re-members the butterfly, sign of doubleness, which she had previously cut apart
In short, the whole thing is a parable about the Christian virtue of forgiveness.
[Edited to add spoiler warning]