Monetary Policy 2082/83: Background and Implementation

Nepal Rastra Bank (NRB), in line with Section 4 of the Nepal Rastra Bank Act, 2058, has been publishing annual monetary policies since FY 2059/60. These policies aim to maintain price and balance of payments stability, supporting macroeconomic stability and sustainable development. The monetary policy for FY 2082/83 marks the 24th such policy.

This year’s monetary policy includes a review of the previous year’s policy, an analysis of economic and financial conditions, policy arrangements, and key programs. It also outlines strategies for foreign exchange management, financial sector reform and regulation, payment systems, microfinance, financial access and consumer protection, and anti-money laundering.

While the global economy is gradually recovering, geopolitical tensions and restrictive trade policies in some countries have introduced uncertainty. However, the International Monetary Fund (IMF) notes that global inflation is improving and approaching pre-COVID levels. With both growth and inflation at low levels, many central banks are adopting accommodative monetary policies to stimulate economic expansion.

Nepal's economy is gradually stabilizing. Inflation is within the desired range. Increases in remittance inflows, tourist arrivals, and exports have improved foreign exchange reserves. Sectors previously contracting have started expanding, resulting in improved economic growth compared to the previous year.

Due to ample liquidity in the banking sector, average interest rates on deposits and loans are declining. Deposit interest rates remain higher than average inflation, allowing the economy to benefit from liquidity and lower rates. The financial sector remains stable; however, rising non-performing assets (NPA), non-banking assets (NBA), and blacklisted accounts necessitate caution.

To enhance financial access, mobilize resources for capital formation, and strengthen the financial system, structural, policy, and operational reforms are necessary. Policy formulation should be evidence-based and consultative, with prudent regulation and effective supervision aligned with international best practices. Development of a customer-friendly banking system and reevaluation of bank/financial institution classifications and operational scopes are also required.

This monetary policy has been formulated based on international and national economic and financial conditions and NRB's fourth strategic plan. It also incorporates the Government of Nepal’s FY 2082/83 budget, the 16th Plan, recommendations of the High-Level Economic Reform Commission, the Monetary Policy Advisory Committee, the Banking Sector Reform Taskforce, and suggestions from stakeholders.

Implementation Status of Monetary Policy for FY 2081/82

Macroeconomic and Monetary Targets

The inflation target for FY 2081/82 was to remain within 5.0%. As of Jestha 2082, the average consumer inflation stood at 4.24%. Point-to-point annual inflation in Jestha 2082 was 2.72%.

The policy aimed to maintain foreign exchange reserves sufficient for at least seven months of goods and services imports. As of Jestha end 2082, reserves were enough for 14.7 months.

The policy set the interest rate corridor as follows:

• Upper limit (Standing Liquidity Facility): 6.5%

• Lower limit (Standing Deposit Facility): 3.0%

• Policy rate: 5.0%

The goal was to maintain the weighted average interbank rate near the policy rate. By Jestha end 2082, this rate was 3.0%.

Open market operations were conducted automatically and rule-based for liquidity management, per the policy.

Liquidity Management and Interest Rates

In the first eleven months of FY 2081/82, a total of NPR 2.784 trillion was absorbed through 81 rounds of auction-based deposit collection and NPR 1.85587 trillion through 135 rounds of standing deposit facility. After deducting NPR 27 billion used via overnight liquidity facilities, net liquidity absorption amounted to NPR 2.13408 trillion.

In the previous year, net liquidity absorption through open market tools was NPR 386.84 billion.

In the same period, net NPR 673.25 billion liquidity was injected into the economy via purchase of US dollars from the forex market, compared to NPR 783.47 billion in the previous year.

Short-term interest rates hovered near the standing deposit facility rate. The average interbank rate dropped from 3.62% in FY 2081/82 to 2.99% by Jestha 2082. The weighted average interest rate on 91-day treasury bills was 3.00% in Ashad 2081 and 2.94% in Jestha 2082.

Lower short-term interest rates led to falling deposit and loan rates:

In Jestha 2081:

• Commercial banks: 6.17% (deposits), 10.15% (loans)

• Development banks: 7.07% (deposits), 11.63% (loans)

• Finance companies: 8.28% (deposits), 12.85% (loans)

In Jestha 2082:

• Commercial banks: 4.29% (deposits), 7.99% (loans)

• Development banks: 5.02% (deposits), 9.40% (loans)

• Finance companies: 6.09% (deposits), 10.22% (loans)

Sectoral Credit, Deprived Sector and Concessional Lending

As of Baisakh end 2082:

Commercial banks’ total credit included:

• Agriculture: 13.9% (NPR 647.85 billion)

• Energy: 9.0% (NPR 418.74 billion)

• MSMEs: 10.8% (NPR 503.39 billion)

Development banks invested 26.4% (NPR 132.88 billion) in agriculture, MSMEs, energy, and tourism combined.

Finance companies allocated 18.8% (NPR 19.06 billion) to these sectors.

As of Chaitra end 2081, credit to the deprived sector included:

Commercial banks: 5.6% (NPR 262.22 billion)

Development banks: 7.1% (NPR 36.17 billion)

Finance companies: 5.5% (NPR 5.60 billion)

Under concessional loan programs subsidized by the Government of Nepal:

As of Jestha end 2082:

• Loans had been disbursed to 98,528 borrowers

• Outstanding balance: NPR 85.10 billion

Download Monetary Policy of Nepal FY 2082/2083.PDF