Mid-Term Monetary Policy Review Set to Test Nepal’s Economic Revival Efforts

Nepal Rastra Bank is preparing to release the mid-term review of its monetary policy for the fiscal year 2025/26 (2082/83) this Tuesday, in line with the Monetary Policy Formulation Procedure, 2016. The regulation requires the central bank to publish quarterly and half-yearly reviews within 45 days of the end of each review period. With the deadline approaching, expectations are growing in the financial sector regarding possible policy adjustments.

According to officials and market observers, the upcoming review is likely to focus on technical and operational measures rather than major structural changes. Key areas expected to be addressed include liquidity management, interest rate corridor adjustments, revisions in personal and microfinance lending limits, and loan restructuring facilities for borrowers affected by natural disasters. However, due to the enforcement of the election code of conduct, sweeping policy reforms are considered unlikely at this stage.

Economists believe the review could play a crucial role in boosting private sector confidence, activating banks’ lending capacity, and stimulating overall economic activity. At a time when business sentiment remains fragile, even moderate policy signals from the central bank are expected to influence investment decisions and market behavior.

Earlier in the fiscal year, the central bank had introduced a relatively flexible and expansionary monetary policy aimed at reducing interest rates, expanding credit flow, and easing pressure on banks burdened by rising non-performing loans. While unveiling the policy, Governor Bishwanath Paudel stated that the framework was designed to create a favorable environment for borrowers, banks, and the government alike. The private sector initially welcomed the policy, expecting a revival in lending and investment.

Despite these intentions, credit expansion has remained weaker than anticipated. Political uncertainty, social movements, and subsequent economic disruptions have dampened investor confidence. As a result, a significant portion of funds remains idle in the banking system. Currently, more than NPR 1.15 trillion is estimated to be available for lending, while around NPR 800 billion has been parked at the central bank due to limited credit demand.

The current monetary policy introduced several major provisions. The interest rate corridor was lowered, with the bank rate reduced from 6.5 percent to 6 percent and the deposit collection rate from 3 percent to 2.75 percent. These measures were intended to lower borrowing costs and encourage lending. Similarly, the housing loan ceiling was raised from NPR 20 million to NPR 30 million, while the loan-to-value ratio for first-time homebuyers was maintained at 80 percent.

Support for small and medium enterprises was strengthened by allowing loans of up to NPR 30 million to be counted under priority sectors. Agricultural and small entrepreneurs were encouraged through concessional lending schemes. The limit on margin lending against shares was increased from NPR 150 million to NPR 250 million, reflecting an effort to support the capital market.

The policy also introduced measures to strengthen banks’ capital positions. Regulatory reserves generated from non-banking assets were allowed to be counted as supplementary capital for two years. In response to the rapid growth of digital payments, branch expansion policies were revised, allowing mergers and adjustments of physical branches in urban areas.

Additional provisions included greater flexibility for microfinance institutions to distribute dividends beyond 15 percent annually, classification of foreign employment loans under priority lending, legal preparations for neo-banks, and initiatives to expand financial inclusion and digital banking services. Overall, the policy sought to support real estate, stock markets, agriculture, small businesses, and financial institutions through a liberal and growth-oriented approach.

In its first-quarter review, Nepal Rastra Bank had already moved toward further easing. The standing liquidity facility rate was reduced from 6 percent to 5.75 percent, while the policy rate was maintained at 4.5 percent and the standing deposit facility rate at 2.75 percent. These adjustments were aimed at improving liquidity conditions and lowering funding costs for banks.

The review also introduced loan restructuring facilities for borrowers in flood- and landslide-affected areas. Microfinance loan limits were increased from NPR 700,000 to NPR 1.5 million, and personal overdraft limits were raised from NPR 5 million to NPR 10 million. Moreover, banks were allowed to merge or adjust branches within metropolitan areas to improve operational efficiency.

As the mid-term review approaches, analysts suggest that the central bank faces a delicate balancing act. While there is room to further stimulate lending and economic activity, risks related to inflation, financial stability, and political uncertainty remain. The effectiveness of any new measures will largely depend on whether they can restore business confidence and translate surplus liquidity into productive investment.

Market participants will closely monitor the upcoming review for signals on the future direction of monetary policy. For many, it represents not only a technical adjustment but also a critical test of whether Nepal’s financial system can regain momentum in a challenging economic environment.