How Nepal Rastra Bank’s Monetary Policies Impact NEPSE: A 2025 Investor’s Guide

Introduction

The Nepal Stock Exchange (NEPSE) is not driven solely by earnings and technical charts—macroeconomic policies, especially those issued by Nepal Rastra Bank (NRB), play a crucial role in shaping investor behavior and overall market movement.

Whether you're a beginner or seasoned investor, understanding how NRB’s monetary policy decisions—like changes in interest rates, repo rates, CRR, and liquidity management—affect the NEPSE can help you make smarter investment decisions.

This article explains the impact of NRB policies on NEPSE in 2025, backed by real examples, simplified terms, and actionable takeaways.

1. What Is Monetary Policy and Who Sets It?

Monetary policy is the central bank’s strategy to control money supply, inflation, and interest rates to maintain economic stability.

In Nepal, Nepal Rastra Bank (NRB)—the country’s central bank—is responsible for:

Announcing annual and mid-term monetary policies
Setting key interest rates
Controlling liquidity through repo, reverse repo, SLF
Regulating credit flow in the economy

These policies directly or indirectly affect investment, consumption, banking, and ultimately, NEPSE.

2. Key Tools Used by NRB and Their Meaning

Tool	Full Form	Function	Impact on NEPSE
Repo Rate	Repurchase Rate	Short-term borrowing rate for banks	Lower repo = cheaper credit = bullish market
CRR	Cash Reserve Ratio	% of deposits banks must keep with NRB	Higher CRR = less lending = bearish signal
SLR	Statutory Liquidity Ratio	Liquid assets banks must hold	Tightens liquidity
SLF	Standing Liquidity Facility	Emergency borrowing window	Stabilizes short-term liquidity
CCD Ratio	Credit to Core Capital + Deposit	Lending limit	Direct control on how much banks can lend

3. How Interest Rate Changes Influence NEPSE

When NRB changes the policy rate, it alters:

The cost of borrowing for banks
Lending rates for individuals and businesses
Investment sentiment in equity vs. fixed-income

🔺 When NRB Lowers Interest Rates:

Loans become cheaper → Businesses grow → Higher profits
Retail investors shift money from FDs to stocks
Stock market tends to rally

🔻 When NRB Hikes Interest Rates:

Credit becomes expensive → Slower business activity
Deposits attract more funds → Less investment in stocks
Market sentiment weakens

Case Study 2023–24:
When NRB reduced the policy rate from 6.5% to 6%, NEPSE rallied by nearly 100 points in 3 days, with banking and hydropower stocks leading gains.

4. Liquidity Management & Its Effects on NEPSE

Liquidity in the banking system determines how much money is available for:

Lending to individuals/businesses
Margin lending to stock investors
Market participation in IPOs and secondary market

When Liquidity is High:

Easier loans and margin facilities
Rise in stock buying → NEPSE uptrend

When Liquidity is Tight:

Banks restrict lending
Investors pull money out to meet liabilities
NEPSE volumes drop, prices fall

NRB Tools for Liquidity Control:

Open Market Operations (OMO)
Repo/Reverse Repo Auctions
Foreign exchange interventions

5. Role of Repo Rate & Reverse Repo in NEPSE

Repo Rate ↓: Bullish signal for stocks
Reverse Repo ↑: Bearish signal (withdraws liquidity)

2025 Update:

Repo rate at 4.5% (as of mid-July 2025)
Reverse repo set at 3.5%
Signals a slightly expansionary stance, supporting NEPSE stability

6. CRR and Its Impact

CRR is the percentage of total deposits banks must park with NRB and cannot use for lending.

Higher CRR = Less money to lend = Less liquidity in market
Lower CRR = More room for margin lending = Bullish NEPSE

Example:
In 2021, NRB raised CRR from 3% to 4% → NEPSE dropped 5% in a week due to fears of liquidity crunch.

7. CCD Ratio: Controlling Excessive Lending

NRB uses CCD ratio (Credit to Core Capital + Deposit) to prevent aggressive lending and overheating of the market.

Max CCD ratio = 90% (2025 level)
If exceeded, banks are restricted from further lending

Why It Matters to NEPSE:

Less margin lending = lower investor participation
High CCD → bearish signal
Stable CCD (80–85%) → healthy liquidity → investor confidence

8. How NRB Policy Affects Specific Sectors in NEPSE

Sector	NRB Policy Sensitivity	Example
Banking	Very High	Repo/CRR directly affect profitability
Hydropower	Medium	Affects project financing cost
Insurance	Medium	Impacts return on investment & product pricing
Manufacturing	High	Influences working capital, loans
Finance & Microfinance	High	Sensitive to CRR, SLR, credit guidelines

9. What Investors Should Watch in NRB Policies

Policy Rate (repo/reverse repo): Are we in a tightening or loosening cycle?
Liquidity indicators: OMO announcements, interbank rates
Inflation targets: Signals interest rate direction
Banking sector directives: Lending restrictions, dividend caps
Capital market references: Any mention of stock market reform or development

10. Investment Strategies Around Monetary Policy

✅ During Rate Cuts / Easy Liquidity

Add to growth sectors (hydropower, banks, insurance)
Apply for IPOs (sentiment bullish)
Accumulate dividend-paying stocks

🚫 During Tightening Cycles / High CRR

Reduce margin trades
Focus on defensive sectors (insurance, blue-chips)
Hold cash for dips

11. Recent Trends (2025 Snapshot)

NRB adopted a neutral-to-slightly easing stance in mid-July 2025
Repo rate lowered to 4.5%
Inflation under control at 5.2%
Commercial banks' average lending rate down to 11.25%

This environment favors:

Moderate NEPSE recovery
Growth in banking and hydropower stocks
Improved IPO response

Conclusion

Nepal Rastra Bank’s monetary policy is a powerful force behind NEPSE’s movement. While corporate performance matters, interest rates, liquidity controls, repo decisions, and reserve ratios are what shape the mood and momentum of the market.

By keeping track of NRB’s policy signals, investors can anticipate market shifts, allocate capital wisely, and protect their portfolios from sudden shocks.