Nepal Central Bank (NRB) Policy Analysis: FY 2025/26 Eight-Month Review
The Nepal Rastra Bank's monetary policy in FY 2025/26 has been characterized by a two-phase approach: accommodation in the first half, followed by tightening from January 2026. Here is a comprehensive review of NRB's policy actions and their effectiveness.
Policy Rate Timeline
| Period | Repo | Bank Rate | CRR | Action |
|---|---|---|---|---|
| Aug-Nov 2025 | 4.50% | 6.00% | 4% | Hold (accommodative) |
| Dec 2025 | 4.25% | 5.75% | 4% | Cut 25bp |
| Jan-Mar 2026 | 5.00% | 6.50% | 4% | Hike 75bp |
NRB's Dual Mandate: Growth + Price Stability
Growth support (Aug-Dec): With inflation below 2% and GDP recovering, NRB maintained an easy stance. The December cut to 4.25% was intended to stimulate credit growth and economic activity.
Price stability (Jan-Mar): As inflation surged from 1.63% to 3.62% and the exchange rate weakened (NPR at 147.94/USD), NRB reversed course with a 75bp hike to 5.0%. This signaled that inflation control had become the priority.
Assessment of NRB's Actions
Positives:
- Quick response to inflation acceleration — January hike was decisive
- Rate corridor functioning well — interbank rate within bounds
- Banking system stable — no liquidity stress despite tightening
- CRR kept at 4% — not over-tightening
Concerns:
- December cut questionable in hindsight — inflation was already trending up
- Reactive rather than preemptive — could have started tightening earlier
- Real rates still low — lending at 8.40% with 3.62% inflation = only 4.78% real
- Limited tools — NPR-INR peg limits exchange rate management
External Sector Management
NRB can be credited with strong external sector outcomes: current account surplus Rs. 552,847.68M, adequate reserves (11-12 months import cover), and stable interbank markets. The remittance surge has given NRB significant room to maneuver.
Conclusion
NRB's policy management in FY 2025/26 has been competent — responding to changing conditions with appropriate rate adjustments. The January tightening was well-timed given accelerating inflation. The key challenge ahead is managing the inflation-growth tradeoff if CPI continues rising toward 4-5% while GDP growth needs support.