Nepal Rastra Bank to Introduce Flexible Monetary Policy

Nepal Rastra Bank (NRB) is preparing to introduce a flexible monetary policy for the upcoming fiscal year to increase credit investment. For the past two years, banks have experienced low credit expansion, leading to an economic downturn. NRB officials have indicated that due to a strong external sector and low inflation, interest rates will not be raised, and policies will be implemented to increase credit expansion. Both the Finance Minister and the Finance Secretary have urged NRB to adopt flexibility. Governor Maha Prasad Adhikari plans to revise the tightened policies implemented post-COVID and channel more investable funds from banks into the market. Some flexibility has already been adopted in the current fiscal year's monetary policy, and more flexibility is expected in the upcoming policy.

Decline in Credit Expansion

Over the past two years, banks have seen a significant decrease in credit expansion, leading to an economic downturn. In the last fiscal year, credit expansion was around 5%, and it is projected to be less than 5% in the current fiscal year. This slowdown has created a recessionary condition in the economy, reducing economic activities.

Strong External Sector and Low Inflation

According to NRB officials, the external sector is robust, and inflation is significantly low. Therefore, the new policy will not raise interest rates. Due to sluggish credit investment, the upcoming policy aims to increase credit expansion, encouraging banks to invest more.

Appeal from the Finance Minister and Finance Secretary

Both the Finance Minister and the Finance Secretary have urged NRB to adopt more flexibility. Finance Secretary Madhu Marasini emphasized in a program on Sunday that "The market needs to invest the more than 600 billion rupees of investable funds held by banks. Money supply is a crucial issue right now, and NRB holds the key to increasing it."

Governor's Plan

Governor Maha Prasad Adhikari intends to revise the stringent policies introduced post-COVID and increase the flow of investable funds from banks into the market. After the onset of COVID, Adhikari introduced several concessions to keep the economy active, resulting in a 27% increase in bank credit investment in one year. However, more recent strict policies have led to a decline in credit investment.

Preparation for Flexibility

Some flexibility has already been implemented in the current fiscal year's monetary policy, and more is expected in the upcoming year. Governor Adhikari has publicly stated that the monetary policy for the next fiscal year will be more flexible. This includes plans to relax some of the tightened credit restrictions.

Pressure on Bank Capital Funds

Recently, pressure on banks' capital funds has rendered some banks unable to invest in credit. Discussions are ongoing to introduce various tools to increase capital funds for these banks, making it easier for them to extend credit.

Importance of Flexible Monetary Policy

The primary objective of a flexible monetary policy is to increase money supply in the economy. When credit investment rises, economic activities across various sectors will grow. This will create jobs, boost production, and contribute to economic growth.

Interest Rates and Credit Investment

When interest rates are low, the likelihood of credit investment by banks increases. Lower interest rates encourage more borrowing, and banks are incentivized to extend more credit. This will have a positive impact on the overall economy.

Need for Credit Investment Concessions

There is a need to provide concessions in credit investment. This involves relaxing some of the stringent credit policies, making it easier for banks to extend more credit.

ncreasing Market Liquidity

Increasing liquidity in the market will boost economic activities in various sectors. This will lead to increased production, job creation, and contribute to overall economic growth..