Monetary policy might sound like a complex financial term, but it’s simply the way a country’s central bank (like Nepal Rastra Bank) controls the supply of money, interest rates, and inflation to keep the economy stable.
If you’ve ever wondered why loan interest rates go up or why prices of goods fluctuate, monetary policy plays a big role. In this blog, we’ll break down everything you need to know about monetary policy in Nepal—its types, objectives, tools, and how it differs from fiscal policy.
What is Monetary Policy?
Monetary policy refers to the actions taken by the central bank of a country to regulate the money supply, control inflation, stabilize currency value, and promote economic growth. By adjusting interest rates and controlling how much money is circulating in the economy, NRB influences spending, borrowing, and investment.
Think of it like a tap controlling water flow—too much money leads to inflation (rising prices), and too little can slow down economic growth.
Types of Monetary Policy
There are two main types of monetary policy:
1. Expansionary Monetary Policy
- Goal: Boost economic growth by increasing the money supply.
- How? Lowering interest rates, reducing reserve requirements for banks, and buying government securities.
- When used? During recessions or slow economic activity.
2. Contractionary Monetary Policy
- Goal: Control inflation by reducing the money supply.
- How? Raising interest rates, increasing reserve requirements, and selling government securities.
- When used? When prices rise too fast (high inflation).
In Nepal, NRB adjusts policies based on inflation, foreign exchange reserves, and economic growth.
Objectives of Monetary Policy in Nepal
The main goals of Nepal’s monetary policy are:
- Control Inflation – Keeping price rises stable (NRB targets around 6-7% inflation).
- Stabilize Currency Exchange Rates – Preventing extreme fluctuations in the Nepali rupee’s value.
- Promote Employment – Encouraging businesses to expand and hire more workers.
- Support Economic Growth – Ensuring enough money circulates for businesses and consumers.
- Maintain Financial Stability – Preventing banking crises and ensuring smooth credit flow.
Tools of Monetary Policy
Nepal Rastra Bank uses several tools to control the money supply:
1. Open Market Operations (OMOs)
- NRB buys or sells government bonds to adjust the money supply.
- Buying bonds → Increases money in the economy.
- Selling bonds → Reduces the money supply.
2. Bank Rate Policy
- The interest rate at which NRB lends to commercial banks.
- Higher rate → Loans become expensive → Less borrowing → Money supply decreases.
- Lower rate → Cheaper loans → More borrowing → Money supply increases.
3. Cash Reserve Ratio (CRR)
- The percentage of deposits that banks must keep with the NRB.
- Higher CRR → Banks have less to lend → Money supply decreases.
- Lower CRR → More funds available for loans → Money supply increases.
4. Statutory Liquidity Ratio (SLR)
- The minimum liquid assets (cash, gold, government securities) that banks must hold.
- Higher SLR → Less money for lending → Tighter money supply.
5. Repo Rate & Reverse Repo Rate
- Repo Rate – Interest rate at which banks borrow from the NRB.
- Reverse Repo Rate – Interest rate NRB pays banks for parking excess funds.
- Adjusting these rates influences lending and liquidity.
6. Moral Suasion
- NRB advises banks to follow certain lending practices without strict regulations.
Monetary Policy vs. Fiscal Policy
In Nepal, both policies work together—NRB manages money flow, while the government adjusts taxes and spending.
How Often Does Monetary Policy Change in Nepal?
Nepal Rastra Bank reviews and updates its monetary policy twice a year:
- Mid-July (Start of Fiscal Year) – Annual monetary policy announcement.
- Mid-January – Mid-term review and adjustments.
However, NRB can make emergency changes if needed (e.g., during COVID-19 or economic crises).
The Bottom Line
Monetary policy is like the steering wheel of Nepal’s economy—NRB adjusts it to keep growth stable, inflation in check, and employment high. By understanding how it works, you can make better financial decisions, whether you’re taking a loan, investing, or just managing daily expenses.