NRB’s Monetary Policy Framework

First published 22 Aug 2026 · Last verified 29 Aug 2026

Lesson 1.1 — Why the Central Bank Sits Upstream of Every NEPSE Trade

Every serious NEPSE investor eventually discovers that the index does not move because of corporate earnings alone. It moves because of the price and availability of money, and in Nepal, both are set — directly and deliberately — by Nepal Rastra Bank (NRB). This is not a peripheral fact to be filed away for macroeconomics trivia; it is the single most important structural truth an investor in Nepali equities must internalize before opening a TMS account. NEPSE is, in composition, a banking-and-financial-institution-heavy market: commercial banks, development banks, finance companies, microfinance institutions, and life and non-life insurers together account for the overwhelming majority of listed market capitalisation and daily turnover. Hydropower counters, the other dominant force on the exchange, are structurally the most leveraged non-financial sector in the country, financed overwhelmingly through long-tenor bank debt. When NRB tightens or loosens the cost and supply of credit, it is not adjusting some abstract macro dial — it is directly repricing the balance sheets of the companies that make up most of the index, and it is directly changing how much money retail and institutional investors have available to deploy into secondary-market trading.

This chapter builds the analytical scaffolding for everything that follows in this book. Before an investor can read a bank's spread income, judge whether a hydropower developer's debt servicing is sustainable, or decide whether a rally in NEPSE reflects genuine earnings momentum or simply a liquidity-driven re-rating, they need a working model of how NRB's monetary policy machinery operates: how the annual monetary policy statement is built, how the policy rate and the interest rate corridor function, how the cash reserve ratio and statutory liquidity ratio constrain what banks can lend, how open market operations and the standing liquidity facility manage day-to-day liquidity, and — critically — how all of this transmits, with a lag, into the deposit and lending rates that show up in bank financial statements and, eventually, into the P/E multiple the market is willing to pay for Nepali equities.

Lesson 1.2 — How the Annual Monetary Policy Statement Is Built

Nepal Rastra Bank is required under the Nepal Rastra Bank Act, 2058 (2002) to formulate and announce a monetary policy for each fiscal year, and by long-standing practice this statement is unveiled in July, around the start of the Nepali fiscal year in Shrawan — recent statements have arrived in early-to-mid July, days before the new fiscal year begins. The governor unveils the statement, but the analytical work behind it is done through the bank's Monetary Policy Department and Research Department in coordination with the Monetary Policy Committee, drawing on a set of core inputs: the balance-of-payments position and foreign exchange reserve adequacy (conventionally expressed in months of import cover), the trajectory of consumer price inflation relative to India (to whom the Nepali rupee is pegged, which structurally imports Indian monetary conditions into Nepal), the pace of remittance inflows (which fund a large share of system-wide deposit growth), private sector credit growth relative to nominal GDP growth, and the health of bank balance sheets as reflected in non-performing loan ratios and capital adequacy.

The statement itself is structured around a small number of headline numerical targets — a real GDP growth assumption, a CPI inflation ceiling, a broad money supply (M2) growth projection, and a private sector credit growth projection — followed by a much longer set of operational and regulatory provisions covering everything from refinancing facility ceilings for productive-sector lending, priority-sector lending quotas, provisioning norms for specific loan categories, margin lending limits for share-backed loans, and adjustments to sector-specific single-obligor limits. For FY 2025/26, NRB set an economic growth assumption of 6 percent and an inflation ceiling of 5 percent, with broad money supply projected to expand around 13 percent and private sector credit growth projected around 12 percent — figures that mark a deliberate easing relative to the contractionary stance NRB had held through FY 2022/23, when the growth target stood at 8 percent but the credit growth ceiling had been slashed to 12.6 percent from the previous year's 19 percent in response to inflation that had surged from roughly 4.4 percent to 8.6 percent and a balance-of-payments crisis that had pushed import cover dangerously low.

This history matters enormously for how an investor should read any single year's statement. NRB's monetary policy has, since FY 2022/23, moved through a clearly identifiable easing cycle: rates were raised sharply to defend the currency peg and rebuild reserves during the 2022 external-sector crisis, held tight through FY 2023/24 as inflation was brought down from above 8 percent toward the mid-single digits, and then progressively eased across FY 2024/25 and FY 2025/26 as reserves rebuilt (helped by strong remittance inflows and subdued import demand) and inflation fell toward target. An investor reading the July monetary policy statement in isolation, without this multi-year context, will misjudge whether a given year's stance is expansionary or merely less contractionary than the year before. The correct analytical habit is always to compare the new statement against the prior year's actual outturns, not merely against its stated targets — NRB, like most central banks, frequently revises its in-year stance through formal quarterly reviews — the first-quarter review typically arriving around Mangsir (November–December) and the half-yearly review around Magh–Falgun (January–February) — as happened when NRB's first-quarter review for FY 2082/83 (December 2025) cut the policy rate further from 4.50 percent to 4.25 percent alongside a reduction in the standing liquidity facility rate from 6.00 percent to 5.75 percent.

Lesson 1.3 — The Interest Rate Corridor: Policy Rate, Bank Rate, and Deposit Collection Rate

Since February 2024, NRB has operated a fully implemented Interest Rate Corridor (IRC) system, which replaced an earlier, looser framework with a cleaner three-rate architecture that any NEPSE investor needs to be able to recite from memory. At the centre sits the policy rate (also called the repo rate), which anchors NRB's benchmark for its principal 14-day repo operations and functions as the reference point around which short-term money market rates are meant to cluster. Above it sits the bank rate — operationally the rate on the Standing Liquidity Facility (SLF) — which forms the ceiling of the corridor: any licensed bank or financial institution facing a temporary liquidity shortfall can borrow from NRB overnight against eligible collateral at this rate, so in principle no bank should ever need to bid up interbank rates above it. Below the policy rate sits the deposit collection rate, operationally the Standing Deposit Facility (SDF) rate, which forms the floor: any bank with surplus cash can park it with NRB overnight at this rate, so no bank should rationally lend to another bank below it. The interbank lending rate — the rate banks charge each other for short-term funds — is supposed to trade inside this corridor, and its position within the band is one of the most immediate, real-time signals of system-wide liquidity conditions available to a Nepali investor.

The corridor has narrowed and moved down substantially across the recent easing cycle. In FY 2022/23, the policy rate stood at 7.00 percent, with the bank rate at 8.50 percent and the deposit collection rate at 5.50 percent — a wide corridor reflecting both the tightening stance and the system's immaturity in managing liquidity within a narrow band. By FY 2023/24 the policy rate had eased to 6.50 percent, the bank rate to 7.50 percent, and the deposit collection rate to 4.50 percent. FY 2024/25 brought the policy rate down to 5.00 percent, the bank rate to 6.50 percent, and the deposit collection rate to 3.00 percent. The monetary policy statement for FY 2025/26 cut further, setting the policy rate at 4.50 percent, the bank rate at 6.00 percent, and the deposit collection rate at 2.75 percent, and the subsequent first-quarter review (December 2025) compressed the corridor again, taking the policy rate to 4.25 percent and the bank rate (SLF) down to 5.75 percent while holding the deposit floor at 2.75 percent.

Nepal Interest Rate Corridor, Selected Fiscal Years

This progression is not a minor technical curiosity — it is the single clearest quantitative expression of NRB's stance shift from post-crisis austerity to deliberate credit-cycle stimulus, and it maps closely onto NEPSE's own multi-year arc. The 2021/22 tightening cycle coincided with a severe correction in the index as bank lending capacity collapsed and margin-lending books were forcibly deleveraged; the subsequent easing cycle from FY 2023/24 onward has coincided with a gradual recovery in system liquidity, a fall in fixed deposit rates that made equities relatively more attractive to yield-seeking savers, and a broad-based re-rating across bank, hydropower, and insurance counters. An investor who tracks only earnings and ignores the corridor will consistently misjudge the timing of NEPSE cycles.

It is worth being precise about what "the policy rate" actually governs mechanically. NRB conducts its primary open market operation — typically a 14-day (and at times 7-day or 28-day) repo auction — at or near this rate to inject liquidity when the system is short, and a reverse repo or deposit collection auction to absorb liquidity when the system is flush. The rate is therefore best understood not as a price NRB imposes on the entire economy directly, but as the price at which NRB itself is willing to lend to, or borrow from, the banking system in its routine liquidity operations; everything else — the SLF ceiling, the SDF floor, and by extension the interbank rate, T-bill yields, and eventually bank base rates and lending rates — is calibrated relative to it.

Lesson 1.4 — CRR, SLR, and the Plumbing That Constrains Lending Capacity

If the interest rate corridor sets the price of liquidity, the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) set the quantity of deposits banks are permitted to lend out in the first place — and for a NEPSE investor analysing a bank's balance sheet, these two ratios are as fundamental as any accounting line item.

The CRR requires every "A," "B," and "C" class bank and financial institution to hold a specified percentage of its total deposit liabilities as a non-interest-bearing balance at NRB. NRB raised the CRR from 3 percent to 4 percent as part of its tightening response entering FY 2022/23, and it has held that 4 percent requirement unchanged through the subsequent easing cycle, including in the FY 2025/26 statement and its first-quarter review, both of which explicitly continued "existing arrangements" for CRR without alteration. Because this reserve earns no return, the CRR functions as a direct tax on deposit-taking: every rupee a bank must sterilize at NRB is a rupee it cannot deploy into an interest-earning loan, and a higher CRR mechanically compresses the loanable funds available system-wide even before any change in interest rates.

The SLR requires banks to hold a further minimum percentage of their deposit and borrowing liabilities in specified liquid assets — principally government treasury bills, development bonds, and NRB instruments — that can be liquidated readily if the bank needs cash but which nonetheless generally earn a positive (if modest) yield, unlike the CRR balance. The SLR has stood at 12 percent for commercial (Class A) banks and 10 percent for development banks and finance companies across the recent cycle, a differential that reflects NRB's judgment that smaller deposit-taking institutions warrant a somewhat lighter mandatory liquidity buffer relative to their balance sheet scale, though in practice it also means commercial banks — which dominate system-wide deposits — carry proportionately more of their balance sheets in low-yielding sovereign paper.

Together, CRR and SLR effectively ring-fence roughly 16 percent of a commercial bank's deposit base (4 percent CRR plus 12 percent SLR) from ever reaching the loan book, before a single rupee of capital adequacy buffer, provisioning requirement, or the bank's own liquidity risk appetite is considered. An investor modelling a bank's earning-asset base, net interest margin, or capacity to grow loans in a given year must start from this constraint: loanable funds are never simply "total deposits," they are total deposits net of CRR, net of SLR, and net of whatever cushion the bank chooses to hold above the regulatory minimum for its own comfort.

The credit-to-deposit ratio ceiling deserves its own emphasis because it is, in practice, frequently the binding constraint rather than CRR or SLR. NRB caps the proportion of core deposits (plus certain qualifying borrowings) that a bank may deploy as credit, conventionally around 90 percent, precisely to prevent banks from over-lending against an unstable deposit base and to preserve a liquidity cushion for depositor withdrawals. During the 2021/22 credit boom, system-wide CD ratios pushed hard against this ceiling, which is exactly why the liquidity crisis manifested as a lending freeze rather than merely higher rates — banks were not simply reluctant to lend at prevailing rates, many were regulatorily unable to lend more at any rate. As of recent reporting, the system-wide CD ratio has eased to roughly the mid-70s percent range against the 90 percent ceiling, indicating meaningful headroom for credit expansion — a condition consistent with, and partly explanatory of, the liquidity surplus and falling deposit rates that have characterised the FY 2024/25–2025/26 period.

Lesson 1.5 — Open Market Operations, the Standing Liquidity Facility, and Day-to-Day Liquidity Management

The corridor and the reserve ratios describe the structure within which liquidity operates; open market operations (OMOs) are the day-to-day mechanism by which NRB actually manages the quantity of liquidity in the banking system to keep the interbank rate trading near the policy rate rather than drifting toward either edge of the corridor. NRB's OMO toolkit includes repo auctions (NRB lends cash to banks against government securities collateral, injecting liquidity, typically for 14-day tenors though shorter and longer tenors are used opportunistically), reverse repo and deposit collection auctions (NRB borrows cash from banks, absorbing surplus liquidity when the system is flush), outright purchase and sale of government securities, and the direct issuance or auctioning of NRB's own instruments. The decision to run injection operations versus absorption operations in any given week is a direct, observable signal of the underlying liquidity condition, and it is reported regularly and is publicly available — a level of transparency Nepali investors should make active use of rather than relying solely on headline policy rate announcements made once or twice a year.

Standing facilities exist precisely because scheduled OMO auctions cannot address every bank's liquidity need at every moment — a bank facing an unexpected shortfall on a given day cannot wait for the next scheduled repo auction. The Standing Liquidity Facility allows any eligible bank to borrow overnight against qualifying collateral at the bank rate (the corridor ceiling) essentially on demand, functioning as Nepal's version of a lender-of-last-resort facility for routine liquidity management (distinct from, and less dramatic than, genuine solvency-crisis interventions). The mirror-image Standing Deposit Facility allows banks with surplus cash to park it overnight at the deposit collection rate (the corridor floor) — though in practice this facility has at times operated on a limited weekly schedule (reported as available roughly three days a week) rather than being continuously available every business day, a structural quirk that has occasionally contributed to interbank rate volatility even within an otherwise well-functioning corridor.

The practical significance for a NEPSE investor is this: the interbank rate — freely observable and reported daily — tells you in real time where system liquidity actually sits within the corridor, and by extension tells you whether banks are liquidity-constrained or liquidity-flush right now, well before that condition shows up in a bank's quarterly disclosures or in NRB's periodic macroeconomic reports. As of recent data, the interbank rate has traded around 2.75 percent, below the 4.25 percent policy rate and comfortably above the SDF floor, which is itself diagnostic: an interbank rate persistently below the policy rate (rather than clustering near it) indicates the system is running a liquidity surplus, with banks more eager to lend to each other overnight than to bid for scarce funds — consistent with the broader picture of ample liquidity buffers (the net liquid assets–to–deposits ratio of BFIs recently reported in the high-30s percent) and a CD ratio well below its ceiling.

Refinancing facilities deserve a place in this lesson as well, since they are one of NRB's most Nepal-specific and NEPSE-relevant tools. Beyond the general corridor and OMO framework, NRB maintains targeted refinancing windows — concessional-rate facilities through which banks can borrow from NRB specifically to on-lend to designated priority sectors: agriculture, cottage and small industries, tourism recovery, earthquake- and disaster-affected borrowers, and export-oriented enterprises among them. Because these facilities carry sub-market rates and defined ceilings that NRB adjusts nearly every monetary policy cycle, they represent a direct, engineered channel through which monetary policy shapes sectoral credit allocation rather than merely the aggregate quantity and price of credit — a nuance that matters when assessing, for instance, why certain development banks or finance companies with concentrated priority-sector books show credit growth patterns that diverge from the commercial banking system average.

Lesson 1.6 — From NRB's Desk to NEPSE's Ticker: The Transmission Mechanism

Understanding each instrument individually is necessary but not sufficient; the investor's real analytical task is tracing the transmission chain from an NRB policy decision through to a NEPSE price movement, and recognising that this chain operates with meaningful lags at each link.

The first link is the money market. A policy rate cut, reinforced by liquidity-injecting OMOs, pulls the interbank rate down toward the new, lower policy rate, and correspondingly pulls down short-term instrument yields — treasury bill rates most visibly, since T-bills are actively traded and repriced continuously. This link is fast, typically showing up within days to a few weeks.

The second link is bank funding costs. As money market rates fall and NRB's deposit collection/SDF rate compresses, banks face less competitive pressure to offer high fixed deposit rates to attract savers, and deposit rates across the system begin to decline — a process NRB's easing cycle has visibly driven, with average system deposit rates recently reported near 3.5 percent, down substantially from the double-digit deposit rates banks were forced to offer during the 2022 liquidity squeeze to retain depositors. This link operates with a lag of roughly one to two quarters, since existing fixed deposits reprice only as they mature and are rolled over, not instantaneously.

The third link is lending rates. Nepali banks price loans using a base rate methodology prescribed by NRB, built substantially from the bank's cost of funds (heavily influenced by deposit rates) plus a spread; as deposit costs fall, base rates fall, and average lending rates follow — recently reported around 7.0 percent system-wide, down sharply from the 12–13 percent-plus levels seen at the peak of the 2022 tightening cycle. This link lags the deposit-rate link by a further one to two quarters, because loan repricing under floating-rate structures typically occurs on a periodic (often semi-annual) reset schedule rather than continuously.

The fourth link, and the one of most direct interest to a NEPSE investor, is where this repricing shows up in corporate and bank fundamentals. For banks and financial institutions themselves, falling rates compress net interest margins if lending rates fall faster than deposit rates (a squeeze scenario), or expand margins if the reverse holds — and getting this sequencing right, quarter by quarter, is a core analytical skill this book will return to when it covers bank financial statement analysis in later chapters. For hydropower developers, most of whom carry debt-to-equity ratios that would be considered aggressive in any other sector but are structurally normal given the capital intensity and long payback periods of run-of-river and storage projects, falling interest rates directly reduce debt servicing costs and can materially improve reported net profit even absent any change in generation volumes or power purchase agreement tariffs — making hydropower counters some of the most interest-rate-sensitive equities on the exchange. For insurers, particularly life insurers with long-duration liabilities, the picture is more ambiguous: falling rates reduce the yield available on new investment in government securities and fixed deposits (major components of insurer investment portfolios), which can pressure investment income even as lower rates support the broader equity market where insurers also hold substantial trading and available-for-sale portfolios.

The fifth and final link is the direct liquidity channel into the secondary market itself, operating in parallel with, rather than strictly after, the fundamental-repricing channel described above. As deposit rates fall, savers who had parked money in fixed deposits during the high-rate 2022–23 period face a shrinking incentive to keep renewing them, and a portion of that capital rotates toward alternative stores of value — NEPSE prominent among them for Nepali households, alongside real estate and, for some, remittance-funded consumption. Margin lending — loans banks extend against pledged shares, subject to NRB-set loan-to-value and single-obligor limits that are themselves adjusted nearly every monetary policy cycle — expands when banks have surplus loanable liquidity and depressed rates make margin-financed equity positions more attractive relative to their financing cost, amplifying whatever price move a favourable earnings or macro backdrop initiates. This is precisely the mechanism that made the interest rate collapse of FY 2024/25–2025/26 coincide with a broad-based NEPSE recovery: falling deposit rates pushed savers toward equities at the same time that falling borrowing costs and ample bank liquidity made margin financing cheaper and more available, a genuinely reflexive dynamic investors should recognise rather than mistake for a pure earnings-driven bull market.

Remittances deserve explicit treatment as the macro-financial backdrop against which all of this operates, because Nepal's monetary and banking system is unusually dependent on them relative to peer economies. Remittance inflows fund a large share of system-wide deposit growth, underpin the foreign exchange reserve position that gives NRB room to ease or forces it to tighten, and indirectly determine how much fresh loanable liquidity enters the banking system independent of domestic credit creation. Recent periods have seen robust remittance growth alongside comfortable foreign exchange reserves (reported above USD 23 billion through 2026, translating into an import cover comfortably above the informal 7-month adequacy benchmark NRB itself references in its policy statements) — a combination that has given NRB the external-sector room to run the easing cycle described throughout this chapter. An investor should therefore watch remittance growth data and the monthly forex reserve position published by NRB not as a standalone macro curiosity, but as a leading indicator of how much room NRB has to continue easing, or how soon it might need to reverse course, exactly as it was forced to do entering FY 2022/23.