Monetary policy refers to the set of actions and strategies implemented by the Nepal Rastra Bank (NRB)—the central bank of Nepal—to regulate the money supply, credit, and interest rates in the economy.
The main aim is to achieve economic stability, control inflation, encourage investment, and support sustainable economic growth. It is one of the most important macroeconomic tools used by the government to manage the overall economic environment.
In Nepal, the monetary policy is announced annually by the Nepal Rastra Bank in line with the government’s fiscal policy to ensure coordination between monetary and fiscal measures.
Objectives of Monetary Policy in Nepal
- Price Stability:
To control inflation and maintain the stability of prices so that the purchasing power of money remains stable. - Economic Growth:
To create a favorable financial environment for production, employment, and investment that promotes sustainable economic development. - Financial Stability:
To ensure the soundness of the banking and financial system and build public confidence in financial institutions. - External Sector Stability:
To maintain a stable foreign exchange rate and balance of payments through effective monetary control. - Promotion of Productive Sector Credit:
To encourage banks to provide loans to agriculture, energy, manufacturing, tourism, and small businesses. - Encourage Digital and Inclusive Banking:
To promote financial inclusion by providing access to banking facilities in rural areas and supporting digital payment systems.
Instruments of Monetary Policy
The Nepal Rastra Bank uses various monetary tools to achieve these objectives, classified as quantitative and qualitative instruments:
1. Quantitative Instruments:
These tools affect the overall money supply in the economy.
- Bank Rate Policy:
NRB changes the rate at which it lends to commercial banks, influencing lending rates and investment levels. - Cash Reserve Ratio (CRR):
The proportion of deposits that commercial banks must keep as reserves with NRB. A higher CRR reduces lending capacity. - Open Market Operations (OMO):
Buying and selling of government securities in the open market to control liquidity. - Statutory Liquidity Ratio (SLR):
The percentage of deposits that banks must maintain in liquid assets such as cash, gold, or government securities.
2. Qualitative Instruments:
These tools guide the direction of credit flow in the economy.
- Credit Control and Rationing:
NRB limits the amount of credit that can be provided to non-productive or speculative sectors. - Moral Suasion:
NRB persuades banks to follow desired lending and investment behavior. - Margin Requirements:
Regulates the margin between the value of collateral and the amount of loan given. - Selective Credit Control:
Directs loans towards priority sectors like agriculture, industry, and small enterprises.
Importance of Monetary Policy in Nepal
- Controls Inflation and Ensures Stability:
Helps maintain stable prices, preventing economic fluctuations. - Encourages Investment:
By regulating interest rates, it promotes borrowing for productive purposes. - Supports Employment Generation:
By stimulating industrial and business activities, it helps create job opportunities. - Balances Trade Deficit:
Helps manage imports and exports through foreign exchange stability. - Ensures Financial Discipline:
Strengthens the banking system and maintains public trust in financial institutions. - Promotes Economic Development:
Encourages lending to priority and productive sectors to achieve inclusive economic growth.
