Nepal Rastra Bank (NRB) on Friday unveiled monetary policy for the Fiscal Year 2025/26 with a number progressive measures aimed at stimulating key sectors, resolving structural inefficiencies in the banking system and addressing the long-standing concerns of entrepreneurs and financial institutions alike. From recalibrating the interest rate corridor and easing working capital rules, to facilitating capital mobilization and streamlining compliance procedures, the policy appears to set a pragmatic tone. While there is a question whether these policies will bring overall macroeconomic stability, the NRB’s reduction in policy, deposit and bank rates reflects a shift towards easing liquidity and encouraging lending. The move is timely, considering the sluggish pace of private sector credit growth and the need to inject vitality into a slowing economy. Similarly, the revision of working capital loan guidelines and expansion of SME loan definitions respond directly to business community demands. In principle, these measures could enhance credit access, especially for sectors like agriculture, education and media, which are often underserved.
The monetary policy also addresses the issue of real estate, which is another sector facing sluggishness in recent years. This sector is poised to benefit from increased loan caps and more flexible restructuring provisions. The raising of margin lending limits is likely to boost investor confidence in the capital market. Reforms enabling interest capitalization in energy, support for migrant worker loans and revised microfinance dividend caps all reflect an intent to rebalance growth, inclusion and financial sector health. These sector-specific interventions are expected to respond to the ground realities of the current financial ecosystem. However, monetary policy cannot simply be a tool for addressing sectoral frictions. It must also provide a cohesive vision for macroeconomic stability—anchored in inflation control, foreign exchange management, fiscal coordination and growth sustainability. While we need to wait to see the outcomes of the provisions of the monetary policy, the policy appears to fall short in addressing the broader economic context. The country continues to face low domestic investment, a widening trade deficit, weak export competitiveness and high outmigration. Inflationary pressures, though somewhat contained for now, remain a risk amid global uncertainties and volatile remittance inflows, mainly due to simmering tension in the Middle East. Yet, the monetary policy does not seem to clearly articulate a strong stance on inflation targeting, nor does it seem to propose any substantial coordination mechanism with fiscal policy to manage aggregate demand and public debt levels.
While the introduction of Neo Banks and centralized KYC systems are steps toward financial modernization, there is little emphasis on strengthening regulatory oversight and governance in light of rising non-performing assets and operational risks in the financial sector. The review of capital adequacy norms and provisioning practices is a step in the right direction, but more aggressive enforcement and transparency mechanisms are required to ensure these revisions are meaningful. While the policy appears overly lenient in permitting the use of foreign currencies, the NRB must exercise greater caution in preventing their use for importing luxury or conspicuous goods. At the same time, it should introduce countermeasures to address potential liquidity traps that may arise from the significantly reduced interest rates. On one hand, the policy aims to maintain inflation at a ceiling of five percent; on the other hand, this goal seems contradictory, as macroeconomic theory suggests that lower interest rates could fuel inflationary pressures. These being said, the NRB’s monetary policy for the upcoming FY is largely business-friendly and reform-oriented. It takes concrete steps to unlock lending, encourage investment and reduce procedural hurdles. However, in an increasingly fragile global and domestic economic environment, the central bank must balance sectoral interventions with a robust commitment to macroeconomic discipline. A sound banking system is a necessary condition for economic growth—but not a sufficient one.