MONETARY POLICY IN NEPAL

A seminar paper

By

Shreejana Neupane
Exam Roll : 37801
Tu Registration No: 7-2-49-329-2023
Bachelor of Business Administration
Second semester
Contemporary Issue of macroeconomics

Submitted to
Faculty of management
Tribhuvan multiple campus
Tribhuvan University

January 2025
 Declaration
This is to certify that I have sincerely completed the seminar paper “ monetary policy in Nepal “
on my own labour. This project is submitted by me under the guidance of Sharda Bhattarai sir for
the partial fulfillment of the requirement for the degree of bachelor of business administration at
faculty of management, Tribhuvan University under my guidance and supervision. I
acknowledge that plagiarisms the unacknowledged use of another persions ideas , words or
work. I confirm that this is my original work.

Date :
Signature :
Name :
 Acknowledgement
The most important thing I have learned from Tribhuvan university is how to transform
theoretical knowledge, gained from the university into practical knowledge through research. I
would like to express my gratitude to all who, directly and indirectly, helped me on this project.
In the same way, i would like to thank my teacher Mr sharda bhattarai sir for giving me ideas
and technique for better work and also improving my structural work.

Thank you

Name: Shreejana Neupane

Date:
 1

Chapter 1
Introduction
Background
Monetary policy refers to the process by which a country’s central bank, in this case, the Nepal
Rastra Bank (NRB), manages the money supply and interest rates to achieve specific economic
goals such as controlling inflation, stabilizing the currency, achieving full employment, and
fostering economic growth. In Nepal, monetary policy plays a crucial role in maintaining
macroeconomic stability, especially in the face of external shocks, fiscal imbalances, and
inflationary pressures.Since the adoption of a market-oriented economy, Nepal’s monetary policy
has undergone significant changes to address emerging challenges and align with global
economic trends.

This report aims to provide a comprehensive analysis of Nepal’s monetary policy, examining the
role of the NRB in managing the country’s economy. It explores the objectives and tools of
monetary policy, reviews recent trends and developments, and analyzes the effectiveness of these
policies in achieving key economic goals.Furthermore, it discusses the challenges faced by
Nepal’s monetary authorities and offers recommendations for enhancing the overall effectiveness
of monetary policy in the country.In light of Nepal’s growing economic challenges, this report
seeks to highlight how monetary policy can play a key role in mitigating inflationary pressures,
stabilizing the currency, and promoting sustainable economic growth.Thus , the monetary policy
is one of the important macroeconomic policies which is practiced by the monetary authority or
central bank to achieve predetermined objectives through the changes in money supply, credit ,
and interest rate in the economy. There are mainly two sub-divisions of macroeconomic policy.
They are fiscal policy and monetary policy.Monetary policy is formulated based on the domestic
as well as external economic and financial situation and outlook along with considering the
objectives and priorities of the bank, and the implementation status of the monetary
policy .Monetary policy is important because it helps manage the overall health of a country’s
economy. In short, good monetary policy helps create a stable economic environment, which
benefits everyone by keeping inflation in check, encouraging growth, and managing economic
downturns. Monetary policy in Nepal is managed by the Nepal Rastra Bank (NRB), which is the
central bank of the country. The NRB was established in 1956, and it plays a crucial role in
 2

regulating the money supply, controlling inflation, managing the exchange rate, and promoting
overall economic stability. The Nepal Rastra Bank has faced numerous challenges in its efforts to
maintain economic stability, especially given the country’s vulnerability to external shocks, such
as fluctuations in global commodity prices and the global economic environment. In addition, the
heavy dependence on remittances (which constitute nearly 25% of Nepal’s GDP) has made it
challenging to regulate the flow of money within the domestic economy effectively.

According to Paul Einzing ,” Monetary policy includes all monetary decisions and measure
irrespective of weather their aims are monetary or non monetary, and all non monetary decisions
and measures that aim at affecting the system.”

In the words of A.J. Shapiro ,” Monetary policy is the exercise of the central bank’s control over
the money supply as an instrument for achieving the objectives of the economic policy.”

Monetary policy is an essential program of action undertaken by the monetary authority,

generally the central bank ,to control and regulate the supply of money and the flow of
economics.Monetary policy is how a country’s central bank controls the supply of money and
interest rates to manage the economy. It helps control inflation, stabilize the currency, and
promote economic growth. Side economic policy used by the government of a country to achieve
macroeconomic objectives like inflation, consumption, growth and liquidity.

Statement of the Problem

Nepal’s economy is characterized by a relatively low level of industrialization, heavy
dependence on agriculture, and a lack of diversified export markets. The implementation of
monetary policy in such an environment presents unique challenges, including managing
inflation, stabilizing the exchange rate, and ensuring access to credit. Furthermore, the
coordination between fiscal policy and monetary policy remains a persistent issue. This study
seeks to explore how effectively Nepal’s monetary policy addresses these challenges and its
impact on the economy.

Objectives of the Study

The primary objectives of this study are:

1. To analyze the evolution of Nepal’s monetary policy.

2. To evaluate the effectiveness of the Nepal Rastra Bank’s monetary policy tools.
 3

3. To assess the impact of monetary policy on inflation, exchange rates, and economic
growth in Nepal.

Overall, Nepal’s monetary policy is aimed at maintaining a stable and sustainable

macroeconomic environment, supporting growth, and ensuring financial stability in the
face of both domestic and external challenges.

Methods
To fulfill the objectives of the seminar paper, the literature review approaches of study is
used. To study regarding the theoretical as well as empirical perspective of monetary policy
practice in Nepal, the books, research articles and journals are reviewed and analyzed them to
draw the conclusion of seminar paper.

Significance of the Study

This study is significant as it provides insights into the functioning of monetary policy in Nepal
and its effects on the national economy. Policymakers, financial institutions, and economists can
use the findings to make informed decisions on monetary policy adjustments. Understanding the
strengths and weaknesses of the current monetary policy framework will help optimize economic
outcomes and address structural challenges.

Limitations of the Study

 The study focuses mainly on the monetary policy tools of Nepal Rastra Bank, and does
not include an in-depth analysis of fiscal policy or trade policy.
 The data used in the analysis may be subject to limitations due to availability or
inconsistencies in statistical reporting.
 The study does not account for all external factors (such as natural disasters or
geopolitical tensions) that may affect the effectiveness of monetary policy.
 4

Chapter 2
Literature review
A literature review on monetary policy in Nepal reveals that the primary focus of the Nepal
Rastra Bank (NRB) is managing inflation, maintaining a favorable balance of payments (BOP),
and supporting economic growth through financial stability, often relying heavily on tools like
the bank rate, reserve requirements, and open market operations to achieve these goals; however,
challenges arise due to the underdeveloped financial market, significant reliance on remittances,
and limitations in the transmission mechanism of monetary policy, particularly the interest rate
channel. Monetary policy has been widely studied globally, and several scholars have explored
its effects on national economies. The literature on Nepal’s monetary policy, however, is
relatively limited. Below are key studies relevan

1. Role of Central Banks in Developing Economies

A study by Malla (2013) explores how central banks in developing countries, including Nepal
Rastra Bank, employ tools like interest rates and reserve requirements to manage inflation and
stabilize the economy. According to the study, Nepal’s central bank faces challenges in
controlling inflation due to the economy’s structural weaknesses.

2. Inflation Control through Monetary Policy in Nepal

Sharma (2015) argues that despite the Nepal Rastra Bank’s efforts, inflation has remained
volatile, driven by external factors such as global commodity price fluctuations and internal
challenges such as a narrow tax base. The study highlights the importance of building effective
monetary policy frameworks to mitigate such risks.

3. Impact of Exchange Rate Policies

A study by Gautam (2017) examines the relationship between Nepal’s monetary policy and
exchange rate stability. It concludes that Nepal’s monetary policy has had limited effectiveness in
stabilizing the exchange rate, especially given Nepal’s reliance on imports and remittances.

4. Challenges in Implementing Monetary Policy in Nepal

According to Koirala (2018), one of the key challenges in implementing effective monetary
policy in Nepal is the lack of well-established financial markets and the dependency on a few
 5

large commercial banks. The study suggests that expanding financial inclusion and enhancing
market efficiency would support better monetary policy outcomes

5. Monetary Policy and Inflation Control in Nepal

A study by Shrestha and Bhatta (2019) highlights the effectiveness of Nepal’s monetary policy in
controlling inflation. They conclude that while Nepal Rastra Bank (NRB) has managed to keep
inflation under control through interest rate adjustments, external shocks such as rising oil prices
continue to challenge this effort.

6. Role of Nepal Rastra Bank in Shaping Monetary Policy

In their 2020 study, Adhikari and Yadav discuss the central role of Nepal Rastra Bank in the
formulation and execution of monetary policy. They note that NRB’s tools, such as the repo rate
and reserve requirements, have been pivotal in regulating liquidity and maintaining price
stability, although there are concerns over the limited scope for autonomous policy decisions due
to political influence.

7. Investigates the impact of monetary policy on exchange rates in Nepal.

Gurung (2022) The study shows that while Nepal Rastra Bank’s interventions have helped
stabilize the exchange rate in the short term, persistent trade imbalances and external debt remain
major challenges. The author advocates for a more proactive approach in managing Nepal’s
foreign exchange reserves and strengthening the overall economic structure to ensure long-term
stability.

8. The Impact of Exchange Rate on Monetary Policy in Nepal

According to Sharma (2021), the pegging of Nepal’s currency to the Indian Rupee has
significantly influenced its monetary policy decisions. The study suggests that this fixed
exchange rate policy limits Nepal’s ability to implement an independent monetary policy,
particularly in addressing external economic shocks.
 6

Chapter 3
Methodology
This section outlines the methodology used for conducting the research.

 Research Design

The study adopts a descriptive research design, which allows for a comprehensive understanding
of monetary policy and its effects on Nepal’s economy. The research will analyze secondary data
collected from sources like Nepal Rastra Bank, the World Bank, and other financial institutions.

 Data Collection

Secondary data will be used to assess the monetary policy decisions of Nepal Rastra Bank,
including interest rates, reserve requirements, and inflation trends. Data will be gathered from
annual reports, government publications, and academic studies.

 Sampling

The research will focus on data from 2000 to 2024, providing a comprehensive view of the
evolution of monetary policy over the past two decades.

 Data Analysis

The study will employ quantitative methods, using statistical tools to analyze trends in inflation,
interest rates, and economic growth. Correlation analysis will be used to determine the
relationship between monetary policy actions and macroeconomic variables.

Here are some recent analyses of monetary data in Nepal:

1. Foreign exchange reserves

Nepal’s foreign exchange reserves have been an important tool for controlling inflation.
In 2023/24, the Nepal Rastra Bank (NRB) set a target of maintaining foreign exchange
reserves to cover seven months of imports. As of eleven months into 2023/24, the
reserves were sufficient to cover 12.6 months of imports.
2. Inflation
 7

In 2023/24, the NRB set a target of keeping inflation within 6.5%. As of mid-June 2024,
the year-on-year inflation was 4.17%.
3. Weighted average interbank rate
In 2023/24, the weighted average interbank rate was 3.36%, which was within the target
range of 3.0–7.0%.
4. Current account deficit
In the first half of 2022/23, the current account deficit decreased from 12.8% to 12.03%.
This was due to a reduction in imports and a large flow of remittances.

Figure 1
Trend of inflation

Source: Nepal Rastra Bank (NRB)

 8

Nepal’s inflation rate has been rising since the last quarter of 2021-22. In 2022-23, the annual
average inflation rate was 7.74%.

Figure 2
Trend on interest rate corridor

Source: Nepal Rastra Bank ( NRB)

The interest rate corridor is the range of interest rates that the Nepal Rastra Bank (NRB) allows
for interbank transactions. The NRB sets the upper and lower limits of the corridor through its
monetary policy.
 Monetary policy practices in Nepal
Nischal Dhungel (2023) The Nepal Rastra Bank (NRB) , the central bank of Nepal, took an
accommodating Policy stance during the pandemic to support household and business. The
average inflation rate in fiscal year(FY) 2020/21 stood at 3.6 percent and double to 6.32 percent
in FY 2021/22 for the first six months of the current FY 2022/23,it stands at 7.2 percent. Inflation
 9

has significantly increased due to the detrimental effect of supply chain post- COVID19
pandemic and Russia – Ukraine war. Rising inflation raised the cost of fuel and raw materials,
causing production costs to skyrocket. As a result, the output capacities of both small and large-
scale industries have decreased.

Ajay Gautam tested that monetary policy contributes to stabilize the economy in many respects.
As such, there is a practice instating suitable monetary policy going back to the time of the great
depression. Since then, monetary policy has become one of the intense area to research and study
by the economists. Theories like monetarism and New Keynesianism were developed to
understand the monetary dynamics and formulate robust monetary policy.. Over the past 30
years, New Keynesian theory has been used to understand and formulate new monetary policies
with great success. Until recent year, applications of those theories were mostly confined to
developed economics.

 Limitations of Methodology
The use of secondary data limits the ability to gather firsthand insights from key policymakers.

The study may not account for all variables affecting the economy, such as global economic
conditions and domestic political changes.
 10

Conclusion
In conclusion, monetary policy plays a vital role in maintaining macroeconomic stability in
Nepal, influencing key factors such as inflation, exchange rates, and economic growth. Despite
efforts by Nepal Rastra Bank (NRB) to stabilize the economy, there remain significant
challenges, including high inflation volatility, external shocks, and limitations in financial
markets.The effectiveness of monetary policy has been mixed, with successes in controlling
inflation in some periods, but challenges in managing exchange rates and supporting long-term
economic growth.

The study finds that while monetary policy tools, such as interest rates and reserve requirements,
have been used to manage the money supply and inflation, there are structural weaknesses in the
economy that undermine their full effectiveness. These include over-reliance on remittances, a
narrow export base, and limited financial inclusion. Moving forward, it is essential for the NRB
to continue refining its policies,focusing on improving financial sector development, enhancing
policy coordination with fiscal policies, and strengthening economic resilience against external
shocks.The findings of this study are crucial for policymakers and economic planners, providing
insights into areas for improvement in Nepal’s monetary policy framework. Future research can
explore the effectiveness of more advanced monetary policy tools, as well as the integration of
monetary policy with broader economic reforms.Monetary policy plays a crucial role in
maintaining price stability and ensuring an adequate flow of credit to the productive sectors of
the economy. While its effects on the real economy typically manifest over prolonged and
uncertain time horizons, its influence on financial markets is more immediate and short-term. In
Nepal, the formulation and implementation of monetary policy is the responsibility of Nepal
Rastra Bank (NRB), the nation’s central bank. The primary objectives of the NRB include
maintaining price stability and fostering sustainable economic growth. As part of ongoing
financial sector reforms, several initiatives have been introduced to enhance the efficacy of
monetary policy. These include improvements to payment and settlement systems, the
development of secondary markets for government securities, and a diversification of the
investor base. Additionally, efforts have been made to reduce transaction costs within the
financial system. Monetary policy also plays a critical role in addressing macroeconomic
 11

imbalances, such as inflation and deflation, and is instrumental in correcting such economic
ailments.

References
Gautam, R. (2017). Impact of Exchange Rate Policies on Nepal’s Economy. Nepal Rastra Bank
Research Paper, Kathmandu.
Koirala, P. (2018). Challenges in Implementing Monetary Policy in Nepal. Journal of Nepalese
Economic Studies, 19(3), 45-58.
Malla, P. (2013). Role of Central Banks in Developing Economies: A Case Study of Nepal Rastra
Bank. International Journal of Economic Policy, 8(2), 123-135.
Shrestha and Bhatta (2019).monetary policy and inflation control in Nepal.
Nepal Rastra Bank. (2024). Annual Report 2024. Kathmandu: Nepal Rastra Bank.
Sharma, N. (2015). Inflation Control through Monetary Policy in Nepal: A Review of
Performance. South Asian Economic Review, 22(4), 215-228.
World Bank. (2023). Nepal Country Economic Memorandum. Washington, D.C.: World Bank
Dhungel (2023). Monetary policy practices in Nepal. Nepal Rastra Bank Research paper,
Kathmandu.