KATHMANDU: As Nepal Rastra Bank (NRB) Governor Mahaprasad Adhikari nears the end of his first term, expectations were high for the second quarterly review of monetary policy, seen by many as a defining moment of his tenure. Many anticipated that Adhikari would introduce significant monetary tools to leave a lasting impact before stepping down. Speculations ranged from introducing populist measures to securing a swift appointment elsewhere after his departure. However, these hopes and predictions have largely fallen short, with limited outcomes materializing.
Governor Adhikari not only signaled but also reinforced that monetary policy should not be overstated in importance—it is merely a “supporting guide” to fiscal policy. This stance contrasts sharply with his earlier efforts during the COVID-19 pandemic, when he expanded monetary facilities significantly, elevating public interest in monetary policy. While his previous attempts to position monetary policy as a central document succeeded, this time, Adhikari emphasized simplicity and continuity, avoiding major changes.
Key Highlights of the Monetary Policy Review
The monetary policy review for the fiscal year 2081/82 was released on Tuesday, spanning seven pages and outlining seven key provisions. Of these, three existing arrangements remain unchanged, while four are new. Below is a concise explanation of the provisions:
Policy Rate Unchanged Amid Economic Concerns
The review noted that despite rising inflationary trends, which typically warrant an increase in the policy rate, economic activity expansion remains a priority. Consequently, the policy rate has been kept at 5%, with the deposit collection rate at 3% and the bank rate at 6.5%. NRB cited concerns about sluggish economic activity and consumer sentiment, opting against raising rates despite average inflation standing at 4.97%.
No Changes to CRR and SLR
The Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) remain unchanged at 4% and 6.5%, respectively. This decision reflects the ample liquidity currently available in the banking system, signaling no immediate need for adjustments.
Loan-to-Value (LTV) Limits Adjusted for Vehicles
NRB maintained the LTV ratio for personal vehicles and all types of electric vehicles at 60%, down from 80% previously. Conversely, the LTV for internal combustion engine (ICE) vehicles increased from 50% to 60%. This move suggests a balanced approach, despite government incentives favoring electric vehicles.
Interest Rate Framework for Microfinance Institutions
Starting from Jestha 2082, microfinance institutions will align their lending rates with the base rate system, eliminating the previous cap of 15%. This change allows microfinance institutions to set premium rates independently, similar to commercial banks.
Provisioning Rate Reduced for Non-Performing Loans
The provisioning rate for non-performing loans has been reduced from 1.1% to 1.0%. This adjustment provides some relief to banks, freeing up approximately NPR 5 billion in provisions, which can now be reinvested or used to enhance lending capacity.
Limits on Foreign Exchange Transactions
Banks are now restricted to holding foreign exchange positions equivalent to 20% of their primary capital. This measure aims to mitigate risks and stabilize the foreign exchange market.
Concerns Over Outward Migration
The review highlighted the growing trend of outward migration, with nearly 700,000 Nepalis leaving for foreign employment over the past three years. Additionally, around 100,000 students annually seek education abroad. These trends raise concerns about their impact on both external and internal economic balances.
Mixed Signals and Limited Impact
While the review introduced minor adjustments, it largely maintained existing policies, reflecting caution amid economic uncertainties. For instance, despite rising inflation, NRB avoided increasing the policy rate to prevent further strain on already struggling industries. Similarly, the reduction in provisioning rates and adjustments to LTV ratios aim to provide modest relief to banks and borrowers without disrupting the broader financial system.
However, critics argue that the review lacks bold measures to address pressing issues such as declining industrial output, stagnation in construction, and the widening trade deficit. By maintaining the status quo, NRB appears to prioritize stability over innovation, leaving stakeholders questioning whether this approach will suffice in driving meaningful economic progress.