NRB prepares for second monetary policy review of the fiscal year

KATHMANDU: Nepal Rastra Bank (NRB) is preparing for the second monetary policy review of the current fiscal year. According to the procedural timeline, the review must be made public by Falgun 15 (mid-March), within 45 days of the end of the second quarter. Currently, internal discussions are underway regarding the existing monetary policy arrangements and potential changes. However, a senior official stated that no significant policy changes are expected this time.

“Changes in monetary policy will only be made if immediate adjustments are necessary. At present, there is no pressing need for such changes,” a source explained. “Therefore, no major revisions are anticipated.” Similarly, no changes were made during the first quarterly review earlier this fiscal year.

Currently, the policy rate remains at 5%, with the deposit collection rate at 3% as the lower limit of the interest rate corridor and the upper limit set at 6.5%. Although inflation rose slightly last month, it remains within manageable limits, according to officials. The budget estimates inflation at around 5.5%, while consumer inflation stood at 5.41% in Poush (mid-January). Officials noted that external factors have had a greater impact on inflation than internal ones.

Banking Sector Concerns

Commercial banks have been demanding a reduction in the provisioning rate for loans, currently fixed at 1.10%. They argue that lowering this rate would ease pressure on lending. NRB is considering reducing it to 1%. Meanwhile, private sector credit growth is projected to increase by 12.5% through monetary policy measures. However, data up to Poush-end shows only a 5.2% rise in credit flow, indicating sluggishness in the economy.

Internal economic activity has been relatively weak, necessitating efforts to stimulate momentum. However, NRB officials argue that monetary policy alone cannot address systemic issues, such as problems in cooperative institutions and sluggish real estate markets. “Monetary policy reviews cannot solve all structural challenges,” they stated.

Stock Market Developments

The stock market has seen growing demands for policy relaxations. With Governor Mahaprasad Adhikari’s term nearing its end, discussions are underway about easing restrictions introduced under his leadership. Investors are urging the removal of the Rs 15 crore cap on individual share-backed loans and advocating for a uniform 100% risk weight on all types of share-backed loans. Presently, loans exceeding Rs 50 lakh carry a 125% risk weight, while smaller loans have a 100% risk weight.

Despite sluggish credit flow in other sectors, margin-based share-backed loans surged by 26% in the first six months of the fiscal year. Data shows that share-backed loans increased from Rs 90.9 billion at the end of Ashadh (mid-July) to Rs 113.77 billion by Poush-end. Given the rapid growth in share-backed lending, NRB plans to maintain a cautious stance, leaving the Rs 15 crore cap on personal loans unchanged.

A senior official emphasized that NRB will not adopt lenient policies toward share-backed loans despite their rising popularity. “We aim to ensure stability in the financial system,” the official stated.