Nepal Rastra Bank Maintains Monetary Policy Framework Amid Economic Stability Goals

Nepal Rastra Bank (NRB) has released the first quarterly review of the monetary policy for the fiscal year 2024/25, maintaining all existing policy measures unchanged.

In its review, the NRB reiterated its cautious and flexible approach, leaving the policy rate at 5%, the deposit collection rate (lower bound of the interest rate corridor) at 3%, and the bank rate (upper bound of the corridor) at 6.5%. The cash reserve ratio (CRR) and statutory liquidity ratio (SLR) have also been kept intact.

The NRB emphasized that this continuity aims to support economic growth while ensuring price stability and external sector stability. The government’s goals for the fiscal year include 6% economic growth and controlling inflation at 5.5%.

Key highlights of the review include:

1. Foreign Exchange Reserves and Remittances:
   Foreign exchange reserves as of October are sufficient to cover 14.6 months of imports, driven by a rise in remittance inflows. The NRB projects continued strength in reserves, as the number of Nepalis working abroad is expected to increase alongside sustained remittance flows.
2. Inflation Trends:
   The NRB projects average annual inflation for 2024/25 to remain around 5%. Year-on-year (y-o-y) consumer price inflation stood at 4.82% in mid-October 2024, down from 7.50% the previous year.
   • Food and beverage inflation: 7.18% (compared to 8.48% last year).
   • Non-food and service inflation: 3.49% (compared to 6.85% last year).
   While inflation has eased, the NRB warned of risks stemming from high food inflation in India, geopolitical tensions in the Middle East and South Asia, and the ongoing Russia-Ukraine conflict.
3. Petroleum Prices:
   Stable international petroleum prices are expected to alleviate pressure on non-food inflation.
4. Natural Disasters and Public Finance:
   Economic losses from heavy rains and floods in September were estimated at NPR 46 billion. The government is anticipated to increase spending on infrastructure repair and reconstruction, adding strain to public finances but potentially stimulating other sectors of the economy and raising demand for investment loans.
5. Economic Activity:
   The NRB maintains a cautiously accommodative monetary policy stance, supported by low inflation and robust foreign exchange reserves, to promote economic activity.

This policy direction is expected to balance short-term stability with long-term economic growth goals.