Economics and Monetary Policy
Domain scope
This section tests macroeconomics and how Nepal Rastra Bank conducts monetary policy in a small, open, import-dependent economy. Expect definitions, monetary aggregates, policy instruments and the consequences of the Indian rupee peg.
Core concepts
- GDP measures output; inflation is usually tracked through the consumer price index; the balance of payments records external transactions.
- Fiscal policy is the government's taxing and spending; monetary policy is NRB's management of money, credit and interest rates.
- M1 = currency in circulation plus demand deposits. M2 = M1 plus time deposits; it is broad money.
- Instruments: CRR, SLR, bank rate, repo and deposit collection rates, open market operations and moral suasion.
- Nepal pegs the Nepalese rupee to the Indian rupee at 1 INR = 1.60 NPR. The peg imports Indian inflation and constrains independent interest-rate setting.
- NRB announces an annual monetary policy and uses a monetary-targeting approach, watching inflation and private-sector credit growth.
Worked example
A bank receives a new deposit of Rs 1,000,000 and CRR is 4%. Required reserves = 4% × 1,000,000 = Rs 40,000; excess reserves = Rs 960,000. The simple deposit multiplier is 1/0.04 = 25, but actual credit creation is lower because of cash leakage and excess reserve holding.
Traps
CRR is held with NRB; SLR is a liquid-asset requirement. The bank rate is not the same as a bank's lending rate. Do not treat the peg as a free-floating exchange rate. Do not mix fiscal policy with monetary policy.