Nepal Rastra Bank Policies & Their Impact on the Stock Market: What Every Investor Should Know

Introduction

The Nepal Stock Exchange (NEPSE) doesn’t operate in a vacuum. Its movements are deeply influenced by Nepal Rastra Bank (NRB) — the country’s central bank, which manages monetary policy, regulates banks and financial institutions, and maintains financial stability.

In this blog, we’ll explore how NRB’s policies impact the stock market and why every investor should pay attention to interest rates, liquidity tools, and regulatory directives issued by NRB.

1. What is Nepal Rastra Bank (NRB)?

Established in 1956, NRB is the central regulatory authority of Nepal’s banking and monetary system. Its responsibilities include:

• Issuing monetary policy

• Managing inflation and liquidity

• Overseeing banks and financial institutions (BFIs)

• Maintaining exchange rate stability

• Acting as the government's banker

NRB’s decisions influence everything from loan availability to interest rates, which in turn affect the performance of listed companies and investor sentiment in the stock market.

2. Key Monetary Tools Used by NRB

To regulate the economy and financial markets, NRB uses several tools:

a. CRR (Cash Reserve Ratio)

Banks must keep a certain percentage of their deposits with NRB.

• Higher CRR → Less money to lend → Less liquidity → Bearish stock market

• Lower CRR → More money to lend → More liquidity → Bullish sentiment

b. SLR (Statutory Liquidity Ratio)

A percentage of bank deposits must be kept in liquid assets like treasury bills or NRB bonds.

c. Repo and Reverse Repo Rates

• Repo Rate: Rate at which NRB lends to banks.

• Reverse Repo Rate: Rate at which NRB absorbs liquidity from banks.

A higher repo rate discourages lending, reducing market liquidity.

d. Bank Rate

The rate at which NRB lends to commercial banks in emergencies. It influences long-term interest rates.

e. Credit to Core Capital plus Deposit (CCD) Ratio

Used to monitor how much a bank is lending compared to its core capital and deposits.

• If the CCD ratio nears the NRB-imposed limit, banks slow down lending.

• This reduces liquidity in the stock market.

3. How NRB Policies Impact NEPSE

Let’s break it down:

✅ Liquidity and Stock Buying Capacity

When NRB loosens monetary policy (e.g., lowers repo or CRR), banks have more cash to lend. Retail and institutional investors then have more access to cheap credit, fueling investment in NEPSE.

🚫 Tight Monetary Policy = Market Correction

When NRB tightens policy (raises CRR, Repo), it restricts liquidity. People borrow less, and investors sell stocks to meet financial needs — leading to a bearish stock market.

4. Interest Rates and Investor Sentiment

📉 High Interest Rates = Declining Stock Market

When NRB increases interest rates:

• Fixed deposits become more attractive

• People move money out of stocks and into banks

• Companies face higher borrowing costs, reducing profit margins

📈 Low Interest Rates = Stock Rally

When interest rates are low:

• More cash flows into stocks

• Companies can borrow at lower rates

• Higher earnings = higher valuations

💡 Real-World Example:

In 2022–2023, NRB raised interest rates to combat inflation. As a result, NEPSE fell sharply due to:

• High loan rates

• Reduced IPO participation

• Lower market liquidity

5. Monetary Policy Announcement and Stock Market Reaction

NRB releases monetary policy annually, usually in July (Shrawan).

Key contents include:

• Repo and reverse repo changes

• CRR & SLR targets

• Inflation outlook

• Lending limits for banks

• Sector-wise lending focus (e.g., priority sectors like agriculture or hydropower)

📊 NEPSE typically reacts within hours:

• Expansionary policy → Market rallies

• Contractionary policy → Market falls

💡 Tip: Always read the monetary policy summary and expert breakdowns on ShareSansar or MeroLagani for quick insights.

6. Impact on Specific Sectors

NRB policies affect different sectors of NEPSE differently:

7. NRB Directives on Margin Lending

Margin lending allows investors to borrow from brokers to buy stocks.

NRB limits:

• Maximum exposure per investor

• List of eligible securities

• Interest rates on margin loans

❗Tighter margin rules = less leverage = lower stock demand.

8. NRB's Role in IPO and Secondary Market Liquidity

NRB indirectly affects IPO and secondary market participation through:

• Setting CRN and bank-linking rules for MeroShare

• Controlling interest rates on IPO financing loans

• Regulating how banks invest in stocks or mutual funds

9. Exchange Rates and Foreign Investment

While FDI in NEPSE is still limited, NRB’s foreign exchange policies affect:

• Remittance inflows, which support local consumption and investments

• Currency volatility, which influences import-heavy companies

• Interest rate arbitrage, affecting cross-border portfolio flows (once liberalized)

10. NRB and Investor Psychology

Even if you don’t directly follow monetary policy, you’re affected by the overall sentiment it creates:

• Bullish if NRB eases liquidity

• Bearish when policies are tight

Investor psychology is a leading indicator of price action in NEPSE.

Conclusion: Why Investors Must Track NRB

NRB isn’t just a central bank — it’s the heartbeat of Nepal’s financial ecosystem. Every interest rate change, liquidity adjustment, or regulatory directive directly affects:

• Your ability to borrow

• Your portfolio performance

• The valuation of listed companies

Whether you’re a long-term investor or a day trader, tracking NRB’s policy updates is crucial for timing your entries and exits in NEPSE.