Kathmandu, Feb 26: Nepal Rastra Bank (NRB) has released the mid-term review of the Monetary Policy for the current fiscal year 2081/82 (2024/25).
In the review, NRB has kept the existing policy rate and deposit collection rate unchanged for banks and financial institutions. However, certain provisions related to loan loss management have been eased, and some modifications have been made to vehicle loan regulations, according to the central bank.
“Although the recent inflation trend suggests a need to increase the policy rate, the cautious and flexible approach adopted while issuing the monetary policy for fiscal year 2081/82 has been maintained to prioritize economic expansion,” NRB stated.
As per the mid-term review, the existing policy rate remains at 5%. The lower bound of the interest rate corridor, i.e., the deposit collection rate, remains at 3%, while the upper bound, i.e., the bank rate, is unchanged at 6.5%. Additionally, the central bank has made amendments to the mandatory cash reserve ratio and statutory liquidity ratio provisions.
Banks and financial institutions have been given some flexibility in loan disbursement. The existing loan loss provision for good loans has been reduced from 1.10% to 1%. Similarly, the limit on “Non-Deliverable Forward” (NDF) transactions under primary capital has been raised from 15% to 20%. NRB has also decided to link the interest rate on microfinance institution loans to the base rate starting from June 2025.
The mid-term review has also revised the loan-to-value (LTV) ratio for vehicle loans. Previously, electric vehicles were eligible for loans of up to 80% of their value, but under the new provision, the LTV ratio for all personal and electric vehicles has been set at a uniform 60%.
NRB maintains that the monetary policy for the current fiscal year follows a cautious yet flexible approach. It believes that the policy will help expand economic activities and contribute to achieving the government’s economic growth targets. However, financial and monetary indicators as of mid-January suggest that while external indicators remain stable, most other economic indicators are in poor condition.
According to the National Statistics Office, economic growth in the first quarter of the current fiscal year is estimated at 3.4%. Paddy production is projected to have increased by 4.04%. However, weak growth in the construction and manufacturing sectors, which have been experiencing negative growth for the past two years, remains a challenge. Despite this, rising hydropower production, expansion in foreign trade, and improvements in the tourism sector are expected to support economic activity.
Analyzing credit flow for the first six months of the current fiscal year, NRB claims that economic activities are expanding. “During this period, banks and financial institutions have invested 8.4% (NPR 68.41 billion) in the industrial production sector, 5.8% (NPR 58.40 billion) in the consumer sector, 4.8% (NPR 48.34 billion) in wholesale and retail trade, and 7.7% (NPR 15.94 billion) in the construction sector,” NRB reported.
The average inflation rate for the first half of the fiscal year stood at 4.97%. The central bank noted that supply chain disruptions caused by floods and landslides in October, along with high food prices in India, contributed to inflationary pressure on food items, peaking in November and December before easing in January.
