KATHMANDU: Nepal Rastra Bank (NRB) unveiled the monetary policy for fiscal year 2025/26 on Friday, focusing on two key risks: preventing negative real interest rates on deposits and directing financial resources toward capital formation.
The policy stresses stabilizing deposit interest rates to maintain depositor confidence and reorienting credit flows toward sectors that directly contribute to capital formation and productivity.
This comes amid concerns that despite lower financial intermediation costs and low interest rates, there has been little improvement in productive investment.
The central bank noted that liquidity pressures have made it difficult for banks to provide interest to savers while failing to significantly boost credit to the productive sector.
“We need to avoid a situation where real interest on deposits turns negative,” the NRB stated.
NRB also acknowledged past policy missteps, indirectly criticizing former governor Maha Prasad Adhikari’s approach that allowed increased non-performing loans.
It labeled some of those pandemic-era measures as “unconventional,” citing the inflation and external sector pressure they triggered.
Despite having ample liquidity and low interest rates, the expected rise in productive credit has not materialized, the NRB said, highlighting the need for better regulatory coherence.
The policy also calls for narrowing the interest rate corridor in line with international best practices to improve monetary transmission, while stabilizing short-term interest rates within the corridor.
Looking ahead, NRB warned of global geopolitical tensions, trade barriers, and fluctuations in oil prices as potential risks, despite current low inflation and strong foreign exchange reserves. It has pledged regular monitoring of key economic indicators like inflation, trade deficit, remittances, and balance of payments to manage these risks.
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