Narrow Money Rebounds: What Does It Signal About Confidence?

Published on September 24, 2025

Narrow money (M1)—which includes currency in circulation and demand deposits—is often seen as a reflection of immediate liquidity and household/business confidence in the financial system. In Nepal, its growth trends over the past few years have been highly volatile, signaling fluctuating confidence. After expanding by 22.8% in FY 2020/21, narrow money growth collapsed to -9.3% in FY 2021/22, reflecting a severe liquidity crunch, rising imports, and tight monetary policy. The slowdown persisted in FY 2022/23, when M1 grew by only 1.2%, and further worsened in FY 2023/24 with a contraction of -1.7%, suggesting households and businesses preferred holding cash or diverting funds to cover rising costs rather than keeping them in the banking system.

However, in FY 2024/25, narrow money rebounded strongly by 22%, and by mid-August 2082/83 (2025/26), it grew another 17.3% year-on-year. This sharp recovery is a signal of renewed confidence in the banking system and improved liquidity conditions. Several factors explain this turnaround: record-high remittance inflows, which flowed directly into bank deposits; easing inflation (down to 1.68% in mid-August 2082/83), which boosted real deposit returns; and improved stability in interest rates, with commercial bank deposit rates averaging around 4–5%. The rebound also reflects reduced panic-driven cash hoarding by households, who now feel more secure keeping their money in banks.

From a policy perspective, this rebound in M1 is encouraging, as it indicates that households and businesses are once again trusting formal financial channels. This enhances the ability of banks to mobilize deposits and extend credit, supporting investment and consumption. However, the challenge remains in ensuring that this renewed confidence translates into higher productive credit growth. While liquidity is flowing back into banks, private sector credit growth is still subdued (6.5–7.7% range in mid-August 2082/83), highlighting a cautious business environment.

In short, narrow money’s rebound signals stronger confidence and financial stability, but it must be accompanied by policies that encourage banks to channel deposits into productive sectors. Otherwise, the risk is that these funds remain underutilized, providing liquidity comfort but limited impact on long-term growth.

Policy Lessons from India: Can Nepal Control Inflation More Effectively?

India has kept inflation relatively moderate through strong agricultural systems, buffer stocks, and inflation-targeting policies, while Nepal has historically struggled with food-driven volatility. Nepal’s CPI fell below India’s in 2025/26 for the first time in four years, but to sustain this trend, Nepal must strengthen supply chains, adopt buffer policies, and set clearer inflation targets.

Inflation Convergence in South Asia: What Nepal-India CPI Data Reveals

Nepal and India’s inflation rates, once far apart, have gradually converged—Nepal’s CPI dropping from 7.74% in 2022/23 to 1.68% in 2025/26, while India’s remained steadier around 2–5%. For the first time in four years, Nepal’s inflation fell below India’s, highlighting both shared regional cycles and unique domestic vulnerabilities.

Nepal vs India: Monthly CPI Comparison and Regional Economic Impact

Nepal’s inflation fell to 1.68% in August 2025/26, below India’s 2.07%, reversing a four-year trend. While both economies share similar seasonal inflation cycles, Nepal’s sharper food-driven spikes contrast with India’s steadier, monsoon-driven patterns. Regionally, this convergence impacts household costs, trade competitiveness, and economic stability.

Inflation Gap Narrows: Nepal’s Deviation with India Falls to -0.39% in 2025/26

In August 2025/26, Nepal’s CPI stood at 1.68%, lower than India’s 2.07%, with the inflation deviation dropping to -0.39% for the first time in four years. While Nepal gained from falling food prices, India’s inflation stayed higher due to agricultural pressures, though both countries continue to face rising service costs.

Cross-Border Inflation Trends: How Nepal and India’s Prices Move Together and Apart

Nepal and India’s inflation trends usually move in sync, reflecting shared regional and global factors. But in August 2025/26, Nepal’s inflation (1.68%) fell below India’s (2.07%) for the first time in four years, thanks to easing food prices in Nepal, while India faced higher agricultural pressures.

Nepal vs India Inflation 2025/26: Why Nepal’s CPI Fell Below India’s for the First Time

In August 2025/26, Nepal’s inflation dropped to 1.68%, falling below India’s 2.07% for the first time in four years. While food price declines drove Nepal’s slowdown, India’s inflation held slightly higher due to agricultural pressures. However, Nepal’s service costs remain a long-term challenge, even as headline CPI looks favorable.