Monetary Policy of Nepal 2083/84: Major Highlights

Nepal Rastra Bank (NRB) has released the Monetary Policy for fiscal year 2083/84. This is the 25th monetary policy published by NRB since it began issuing monetary policies in FY 2059/60. The policy continues a cautiously flexible stance and focuses on supporting economic growth while keeping inflation, liquidity, foreign exchange reserves, and financial stability under control.

Major Highlights

1. Cautiously Flexible Policy Stance Continued

• NRB has continued the cautiously flexible monetary policy stance for FY 2083/84.
• The main aim is to support economic activity while maintaining overall macroeconomic stability.
• The policy also reflects NRB’s view that foreign exchange reserves are in a comfortable position.
• At the same time, it seeks to keep the economy low-cost and support private sector confidence.

2. Economic Growth Target of 7.0 Percent

• The Government of Nepal has set a 7.0 percent economic growth target for FY 2083/84.
• NRB has prepared the monetary policy in line with this target.
• The policy is designed to manage liquidity and foreign exchange in a way that supports growth.

3. Inflation Target Around 5.5 Percent

• NRB expects inflation to remain around 5.5 percent during FY 2083/84.
• The average inflation for the first ten months of the previous fiscal year was 2.66 percent.
• The point-to-point inflation in Baishakh 2083 stood at 5.04 percent.
• NRB expects inflation pressure to gradually ease from the fourth quarter of FY 2083/84.

4. Foreign Exchange Reserve Strength

• NRB aims to keep foreign exchange reserves at a level that can cover at least seven months of goods and services imports.
• The policy expects the current account and balance of payments to remain in surplus.
• Remittance inflows, tourism earnings, and service exports are expected to support reserve strength.

5. Fixed Exchange Rate with Indian Rupee Continued

• The fixed exchange rate system between the Nepali rupee and the Indian rupee has been continued.
• NRB has kept this arrangement as the monetary anchor.
• It will also remain the intermediate target of monetary policy.

6. Interbank Rate Continued as Operating Target

• NRB has continued the weighted average interbank rate of banks and financial institutions as the operating target.
• The central bank will use open market operations to keep the interbank rate close to the policy rate.
• Different tools will be used for structural, regular, and temporary liquidity management.

7. Policy Rate, SDF Rate and Bank Rate Unchanged

• NRB has kept the policy rate unchanged.
• The Standing Deposit Facility rate has also remained unchanged.
• The bank rate under the interest rate corridor has likewise been kept unchanged.

8. CRR, SLR and SLF Provisions Continued

• The existing Cash Reserve Ratio, Statutory Liquidity Ratio, and Standing Liquidity Facility arrangements have been continued.
• NRB has not made major changes in these core liquidity instruments.

9. Liquidity Management Through Foreign Currency Purchase

• NRB has included measures to manage liquidity created through foreign currency purchases.
• Commercial banks will be encouraged to invest in foreign government securities.
• NRB will also introduce arrangements for sterilized intervention when purchasing foreign currency.

10. Focus on Financial Stability

• NRB says the overall financial stability indicators of banks and financial institutions are satisfactory.
• However, some institutions are under pressure due to rising non-performing loans.
• NRB has said that institutions facing capital pressure must be closely monitored.

11. Macro prudential Regulation to Continue

• NRB will continue using macro prudential regulatory tools.
• These tools will be applied when systemic risk appears in any sector of the economy.
• NRB has also said that such tools will not be changed unless necessary.

12. Financial Sector Reform and Digitalization

• The policy gives priority to financial sector reform.
• NRB will focus on better branch management of banks and financial institutions.
• Digitalization will be promoted to reduce financial costs and improve customer service.

13. Review of Bank and Financial Institution Classification

• NRB is studying the classification of banks and financial institutions.
• After the study is completed, new regulatory arrangements will be introduced gradually.
• This is expected to help banks, financial institutions, and non-bank financial institutions expand services in targeted areas.

14. Special Policy Measures for Credit and Borrowers

• NRB will introduce special policy measures to address unlimited liability caused by personal guarantees.
• It will also work to reduce barriers to banking access created by blacklisting due to cheque dishonor.
• Policy arrangements will be made to manage non-performing loans of sick industries and support borrowers under financial pressure.
• NRB will also set share-backed loan limits based on the strength of the concerned institution.
• In addition, the loan-to-value ratio for large electric vehicles used as public transport will be eased.

15. Simplification of NRB Directives

• NRB will simplify the directives issued to banks and financial institutions.
• The language will be made clearer and duplication will be reduced.
• In the first phase, directives related to credit flow, interest rates, and financial consumer protection will be rewritten.

16. Foreign Exchange Circulars to Be Simplified

• NRB will simplify existing foreign exchange arrangements.
• The unified circular issued to institutions handling foreign exchange transactions will also be simplified.
• This is expected to make the system easier to understand and follow.

17. Study on Peer-to-Peer Transactions

• NRB will study the operation of peer-to-peer transactions.
• The study will be based on individual credit scoring.
• This is only a study at this stage and not an immediate implementation measure.

18. Future Policy Direction

• NRB expects inflation pressure to ease gradually in the coming months.
• If inflation pressure increases, the policy stance may be reviewed.
• NRB may also review the policy if enough liquidity and a low-cost economy do not produce the expected benefits.
• If needed, NRB may gradually narrow the existing interest rate corridor.

Conclusion

The Monetary Policy of Nepal 2083/84 continues a cautiously flexible approach. Its main priorities are to support the 7.0 percent growth target, keep inflation around 5.5 percent, maintain foreign exchange reserves for at least seven months of imports, and manage liquidity through open market operations. The policy keeps major monetary instruments unchanged and gives strong attention to financial stability, digitalization, directive simplification, borrower support, and foreign exchange management.