How NRB Monetary Policy Affects Stock Market Fundamentals

Published on October 8, 2025

The Nepal Rastra Bank (NRB) Monetary Policy is one of the most influential tools shaping the direction of the Nepal Stock Exchange (NEPSE) and the overall financial ecosystem. It acts as the foundation of liquidity management, credit expansion, and investor sentiment in the country. Every year, NRB releases its monetary policy outlining strategies for interest rates, credit control, inflation management, and liquidity regulation, which in turn have direct and indirect impacts on company fundamentals, earnings growth, and market valuation.

When NRB adopts an expansionary monetary policy, it injects liquidity into the economy by lowering policy rates, CRR (Cash Reserve Ratio), and SLR (Statutory Liquidity Ratio), and by relaxing margin lending guidelines. This increases the availability of funds within the banking system, making loans cheaper for businesses and investors. As a result, corporate profits rise due to lower financing costs, investment activities expand, and the stock market experiences bullish sentiment. NEPSE typically rallies in such environments because higher liquidity and lower borrowing costs drive demand for equities.

Conversely, when NRB implements a contractionary monetary policy to control inflation or manage external reserves, it raises interest rates and tightens liquidity. This leads to higher borrowing costs for businesses, reducing corporate earnings and capital investment. Banks become conservative in lending, margin financing declines, and liquidity-sensitive sectors like banking, hydropower, and construction face immediate pressure. Consequently, NEPSE often enters a correction phase as investors shift focus toward fixed-income securities and safer instruments.

From a fundamental analysis perspective, NRB’s monetary stance influences key financial ratios and performance metrics such as:

Earnings Per Share (EPS): High interest expenses reduce net profit.
Price-to-Earnings (P/E) Ratio: Valuations drop when borrowing becomes expensive.
Dividend Yield: Companies may retain profits instead of distributing dividends.
Book Value Growth: Slows during tight liquidity conditions.

Additionally, the Credit-to-Deposit (CD) Ratio and interbank interest rate directly indicate market liquidity and credit stress levels. A higher CD ratio and interbank rate usually signal tighter liquidity, discouraging equity investments. On the other hand, falling rates and a lower CD ratio encourage capital inflow into NEPSE.

In the context of Nepal, monetary policy decisions have repeatedly proven decisive — periods of easy liquidity (like 2020–2021) led to record NEPSE highs, while tight liquidity cycles (like 2022–2023) triggered deep corrections. Therefore, understanding NRB’s policies is crucial for both technical and fundamental traders aiming to anticipate market cycles.

According to Sandeep Kumar Chaudhary, Nepal’s renowned Technical and Fundamental Analyst and founder of the NepseTrading Training Institute, “NRB’s monetary policy is the heartbeat of Nepal’s financial system. A wise trader studies its every beat before making a move.” With over 15 years of banking experience and 10,000+ trained investors, he emphasizes that the most successful traders align their strategies with liquidity conditions — buying during easing phases and managing risk during tightening cycles.