The history of monetary policy in Nepal is closely linked to the establishment and development of the Nepal Rastra Bank (NRB), the nation’s central bank. Founded in 1956, the NRB was given the responsibility of unifying the currency system, which at that time included both Nepalese and Indian currencies. Gradually, the NRB eliminated the Indian Rupee, making the Nepalese Rupee the only legal tender. In its early years, monetary policy relied heavily on direct controls, such as regulating interest rates and setting credit ceilings. However, during the economic reforms of the 1980s, Nepal began to adopt indirect monetary policy tools, like open market operations and deregulating interest rates. This change represented a significant shift towards a more market-driven approach. The NRB Act of 2002 reinforced this transition by highlighting the importance of central bank independence and transparency, with annual policy announcements becoming a key element of monetary policy.
Currently, the NRB’s monetary policy aims to ensure price stability, maintain financial stability, and foster economic growth, with broad money growth serving as an intermediate target. However, despite these efforts, Nepal’s monetary policy encounters challenges, especially because of its pegged currency system with the Indian Rupee, which limits its capacity to pursue independent monetary policies. Still, the NRB is dedicated to adjusting its strategies to respond to evolving economic conditions and support sustainable growth in Nepal.
Overview of Nepal’s Monetary Policy for FY 2081/82
Nepal Rastra Bank (NRB), the central bank of Nepal, announced its monetary policy for the fiscal year 2081/82 (mid-July 2024 to mid-July 2025) on July 26, 2024. The policy was designed to support the government’s economic growth target of 6% while aiming to keep inflation within a range of about 5% to 6.5%, thereby ensuring financial stability.
In the mid-term review, published on February 25, 2025, NRB adopted a cautious and pragmatic stance, adjusting its policies in response to the country’s economic conditions six months into the fiscal year. Initially, the central bank aimed to enhance liquidity by reducing the policy rate from 5.5% to 5% and the bank rate from 7% to 6.5%, while maintaining the deposit rate at 3% to promote borrowing and investment. However, the mid-term review indicates a shift towards stabilizing the core rates while making targeted adjustments to lending provisions and regulations specific to certain sectors.
Recent Revision on second quarter
In its semi-annual monetary policy review for the fiscal year 2024/25, released on February 26, 2025, the Nepal Rastra Bank (NRB) introduced several key policy changes:
- Provisioning Rate Reduction: As part of its mid-term review, the Nepal Rastra Bank (NRB) has lowered the provisioning rate for performing loans from 1.10% to 1%. This decision is aimed at alleviating the financial pressure on banks and financial institutions (BFIs), giving them more leeway to direct funds towards lending. By reducing the required provisions, the central bank seeks to encourage credit flow, thereby supporting economic growth while ensuring financial stability.
- Loan-to-Value (LTV) Ratio Adjustments:
- Electric Vehicles (EVs): The LTV ratio for EVs was reduced from 80% to 60%, requiring borrowers to provide a higher down payment for EV purchases. Significant i.e around 70% of vehicles selling in Nepal are now EVs. See: https://nepaleconomicforum.org/decoding-the-rise-of-electric-vehicles-in-nepal/
- Petrol and Diesel Vehicles: Conversely, the LTV ratio for petrol and diesel vehicles was increased from 50% to 60%, making it easier for consumers to finance these vehicles.
- Application of base rate on “D” class financial institution from Jestha 2082, Probably a shift from the fixed interest rate regime of 15%.
- SLR and CLR remained unchanged.
- The Bank rate and other rate of the interest rate corridor remained unchanged.
- Increase in the Limit of non-deliverable forward contract to 20% of core capital from existing level i.e 15%.
These policy changes demonstrate NRB’s dedication to maintaining a balance between financial stability and economic growth. They reflect an adaptation to changing economic conditions and a response to the diverse needs of stakeholders. Through these targeted adjustments, the central bank seeks to create a favorable environment for investment and lending, all while ensuring macroeconomic stability.