Monetary Policy and Central Banking
Mandate and framework
The Nepal Rastra Bank Act 2058 (2002) sets NRB's objectives as price stability, external sector stability and financial sector stability, while supporting sustainable output. NRB is not a formal inflation-targeting central bank; it uses a multiple-indicator approach and announces monetary policy each July for the fiscal year.
Instruments
- Bank rate: the policy signal and the rate at which NRB lends against eligible securities.
- Cash Reserve Ratio (CRR): compulsory unremunerated balances at NRB on domestic deposits.
- Statutory Liquidity Ratio (SLR): liquid assets held in cash and government securities.
- Open market operations: repo, reverse repo, outright purchase or sale of securities, and deposit collection auctions.
- Standing Liquidity Facility and lender-of-last-resort accommodation for temporary shortfalls.
- Foreign exchange intervention to defend the peg of NPR 1.60 per INR.
Transmission
Policy and liquidity operations move interbank rates first; deposit and lending rates follow with a lag; credit and aggregate demand respond last. Because Nepal is pegged, bank-dominated and remittance-heavy, interest-rate transmission is weak, so quantitative tools do much of the work.
Worked example
With CRR at 5 percent and no currency drain or excess reserves, the simple deposit multiplier is 1/0.05 = 20. Starting from NPR 1,000 of reserves, deposits can expand to NPR 20,000. Cutting CRR to 4 percent raises the multiplier to 25 and potential deposits to NPR 25,000 - a NPR 5,000 expansion from the same reserves. This is why a small CRR change is powerful.
Traps
Confusing CRR (cash at NRB) with SLR (liquid assets). Reversing repo direction: a repo injects liquidity, a reverse repo absorbs it. Treating the bank rate as identical to the interbank rate. Assuming Nepal formally targets one inflation number.