When NEPSE Falls and Liquidity Tightens: How Smart Investors Stay Ahead

1. Introduction: Volatility Is Not the Enemy

Every investor loves a bull market. But real wealth in NEPSE is made when the market feels uncertain, liquidity tightens, and fear dominates sentiment.

In recent months, NEPSE has faced a mix of challenges — slow credit growth, rising interest rates, and cautious institutional behavior. Yet beneath this surface, opportunities are quietly forming. For disciplined investors, this is not the time to panic; it’s the time to prepare.

2. The Current NEPSE Landscape

The NEPSE index, which traded above 2,400 points earlier this fiscal year, has corrected to the 2,150–2,200 range. The correction stems from both domestic and global pressures:

• Tight Liquidity: Banks have prioritized loan recovery over new disbursements, limiting margin financing.

• Interest Rate Volatility: Higher deposit rates (up to 10%) attract funds away from equities.

• Reduced Retail Participation: Small investors remain cautious after previous market swings.

• Policy Uncertainty: Investors await clarity on NRB’s mid-term monetary policy revisions.

However, seasoned investors know that these are temporary pressures. Market cycles always revert, and liquidity eventually returns — especially in a remittance-fueled economy like Nepal.

3. Understanding Market Liquidity in Nepal

Liquidity in NEPSE is largely determined by three factors:

1. Bank Deposits and Interest Rates:
   When banks hold more deposits, they extend more margin loans, fueling market activity.

2. Remittance Inflows:
   Seasonal inflows during Dashain, Tihar, and fiscal-year-end periods often trigger short-term rallies.

3. Government Spending:
   When capital expenditure accelerates, it circulates liquidity through the economy, indirectly supporting NEPSE trading volumes.

A well-informed investor watches these liquidity signals more closely than price charts.

4. Why NEPSE Corrections Are Healthy

Corrections are not crashes; they’re pauses. NEPSE’s pullbacks often serve as rebalancing phases — allowing inflated valuations to normalize.

During every correction:

• Weak hands exit, reducing speculative noise.

• Long-term investors accumulate quality stocks.

• Market sentiment resets, preparing for sustainable growth.

For example, NEPSE’s 2022 correction (below 1,900 points) was followed by a strong rally to 2,400+ in 2024. The pattern repeats every few years, favoring patient investors.

5. Identifying Value in Volatile Times

When liquidity tightens, investors should shift focus from momentum plays to value-based accumulation. Here’s how:

✅ Screen for Low P/E and High Dividend Stocks:
Banks, insurance, and hydropower companies with strong balance sheets often trade below fair value during corrections.

✅ Watch for Institutional Buying:
If mutual funds or insurance companies are quietly accumulating, that’s a signal of recovery ahead.

✅ Focus on Fundamentals:
Companies with consistent EPS growth, rising book value, and transparent management often outperform once liquidity returns.

6. Sector Spotlight: Who Benefits When Market Stabilizes

🏦 Banking Sector:
Despite margin pressure, banks benefit once liquidity improves. Dividend yields and book values remain attractive.

💧 Hydropower:
Seasonal production, expanding capacity, and stable PPAs make hydropower stocks steady income plays.

🛡️ Insurance:
Premium growth remains strong, and insurance firms continue paying regular dividends — a defensive play during volatility.

📈 Investment & Holding Companies:
These firms thrive in recovery cycles, leveraging their portfolio exposure to different NEPSE sectors.

7. How Smart Investors Manage Risk

Volatile phases test discipline. Instead of reacting emotionally, informed investors:

1. Rebalance Portfolios: Shift funds from overvalued to undervalued sectors.

2. Use SIPs (Systematic Investment Plans): Small, consistent buying during corrections reduces average cost.

3. Avoid Leverage During Tight Liquidity: Margin loans amplify losses when markets are weak.

4. Track Policy Updates: Interest rate cuts, capital spending announcements, or remittance inflow data can signal the next uptrend.

8. How Policy Drives NEPSE Movements

The Nepal Rastra Bank’s (NRB) monetary stance is the biggest short-term driver of market liquidity:

• Loose Policy: Low interest rates → more liquidity → NEPSE rises.

• Tight Policy: High interest rates → capital outflows → NEPSE correction.

Investors who align with NRB’s liquidity cycle tend to outperform the market.

In 2025, NRB’s cautious tightening has slowed credit expansion, but if inflation stabilizes, a rate cut in mid-2026 could trigger renewed bullish sentiment.

9. The Role of Psychology in Volatile Markets

Market cycles are driven as much by human emotion as by economics. When prices fall, fear dominates; when prices rise, greed returns.

But successful investors act opposite to emotion:

• Buy when fear is high, sell when greed is rampant.

• Recognize that every correction has a recovery phase — the challenge is staying invested long enough to benefit.

As Warren Buffett famously said, “Be fearful when others are greedy, and greedy when others are fearful.” The same applies to NEPSE.

10. Real Examples from NEPSE History

• 2015–2016: Earthquake and blockade led to market dip; NEPSE rebounded 70% in the following year.

• 2019–2020: COVID crash dropped NEPSE below 1,200 points; the index doubled within 18 months.

• 2022–2023: Interest rate hikes caused heavy selling; the market gradually recovered post-Dashain 2024.

Every downturn has produced winners — those who stayed disciplined, bought gradually, and focused on fundamentals.

11. Outlook for 2025–2026

NEPSE’s medium-term outlook remains cautiously optimistic:

• Liquidity will improve post-festival season as remittances and capital spending rise.

• Banking and hydropower sectors are likely to outperform in the second half of 2025.

• Dividend season (Chaitra–Asar) will attract retail interest again.

• Mutual funds may see record NAV gains once interest rates stabilize.

The key is to accumulate during quiet phases and avoid chasing rallies once they begin.

12. Practical Takeaways for 2025 Investors

✅ Stay Invested in Quality: Don’t let short-term corrections shake your conviction.
✅ Track Liquidity Indicators: Follow NRB reports, remittance inflows, and deposit growth.
✅ Focus on Earnings: Profitability drives long-term stock price.
✅ Diversify Wisely: Balance between blue-chips, mutual funds, and dividend-yielding midcaps.
✅ Think in Years, Not Weeks: NEPSE rewards patience, not panic.

13. Conclusion: Strength Lies in Strategy, Not Sentiment

NEPSE’s current volatility is not a collapse — it’s a reset. While many investors view the downturn as a warning, the seasoned see it as preparation for the next phase of growth.

In a country where remittance continues to inject billions, government spending is rising, and private sector profitability is improving, the long-term case for NEPSE remains strong.

“Smart investors don’t time the market — they understand it.”

If you can read liquidity trends, trust company fundamentals, and stay disciplined during uncertainty, you won’t just survive the cycle — you’ll thrive when the next bull market begins.