In his inaugural monetary policy, NRB Governor Dr. Biswo Nath Paudel introduced a cautious expansionary monetary easing stance to address subdued economic activity and growing liquidity by increasing the money supply and reducing interest rates.
By increasing the private sector lending by 12% and expanding the broad money supply by 13%, while keeping the inflation rate under 5% and maintaining the foreign exchange reserve for seven months of imports, the new monetary policy supports the government’s target of reaching economic growth of 6% while maintaining macroeconomic stability.
In line with these goals, the central bank reduced the policy rate from 5% to 4.5%, while also tightening the interest rate corridor from 6% (upper bound) and 3% (lower bound) to 6% and 2.5% respectively. This reduces the bank’s incentives to hold idle funds while channeling liquidity into the economy.
Though the policy keeps the capital reserve requirement and statutory returns unchanged, it continues to pursue an accommodative approach. In his address, Governor Poudel emphasized stimulating demand while preserving positive real return on deposit.
Other key announcements:
Home loan policy adjustment
The ceiling on home loans has been raised to Rs. 30 million with an interest rate cap at the base rate +2%, revitalizing housing affordability amid the subdued real estate activity. In addition to this, the first-time buyers can borrow up to 80% of the property value, while the ratio for others remains at 70%, balancing credit expansion while managing risk.
Share market adjustment
The share-backed loan ceiling has been raised from Rs. 150 million to Rs. 250 million, easing liquidity in the capital market. However, the policy also warns of the growing risk asset bubble, which calls for closer macroprudential oversight.
Agro and SME lending facility
Monetary policy also aims to enhance agriculture and SME lending by allowing banks to independently assess collateral, including crops, farmland, and agro-infrastructure, for loans up to Rs. 1 million, with loan loss provision deferred until after the grace period to improve lending viability.
In light of this, the “NRB with Borrowers” outreach program aims to support this by improving credit access in rural areas and ensuring inclusive growth.
The central bank also aims to enhance agro-lending by diversifying loan products and terms to match the needs of food crops, crop cultivation, livestock production, and aquaculture, to promote effective and targeted credit growth.
Foreign Exchange and Investment Liberalization
The policy reforms were introduced to strengthen Nepal foreign exchange framework and support international trade. In this policy, the outbound forex limit for travellers has been raised to USD 3,000 from USD 2,500. In addition to this, the Foreign Investment and Foreign Loan Management Regulations, 2078 has also been revised to make repatriation of capital, dividends, and interest easier for foreign investors.
To enhance the financial stability, the primary capital requirement on Non-Deliverable Forward (NDF) has also increased from 20% to 25%, reducing the currency risk exposure for investors. While foreign investors are now allowed to hedge forex risk through commercial banks.
In a move toward deeper regional and global integration, Bangladesh Taka and Srilankan Rupees have been added to Nepal’s list of convertible currencies. Moreover, Foreign Exchange Dealers Association of Nepal (FEDAN) rate for remittance exchange mechanism and interbank foreign rate will be reviewed and aligned to international standards, fostering transparency and efficiency in the forex market.
Digital and Structural Reform
Essential digital and structural reforms were also introduced to strengthen Nepal’s banking system. Banks will be classified by risk and governance, with top performers gaining self-regulation. Capital raising is allowed with NRB approval to improve resilience. Foreign joint venture banks can resume retail banking after 15 years, increasing competition. A national KYC system linked to the National ID will simplify customer verification. The policy also supports Neo Banks and Asset Management Companies to modernize services and manage bad loans.
