Why NEPSE Is Falling: 5 Hidden Reasons Most Investors Overlook
NEPSE is falling — but it’s not just about politics or panic. Discover 5 hidden forces driving the decline that most investors overlook.

Nepal Stock Exchange (NEPSE) has been facing a significant decline over the past few months, causing panic among retail investors and traders alike. Red candles dominate the charts, market sentiment is shaky, and social media is full of frustration and speculation. But is it just political tension and interest rates causing this drop?
No. There are deeper and often ignored reasons behind NEPSE’s ongoing correction. In this blog, we will explore the 5 hidden reasons most investors are not aware of — factors that quietly impact sentiment, liquidity, and valuations.
1. Rising Interest Rates Diverting Capital from NEPSE
In the past year, Nepal Rastra Bank (NRB) has adopted a tighter monetary policy to combat inflation and stabilize the economy. This policy direction has resulted in increased interest rates on fixed deposits (FDs) and debentures.
Banks now offer FD returns as high as 10-12%, especially in rural and cooperative sectors. For many risk-averse investors, this is a safer, more predictable option compared to the volatile stock market. As a result, capital is flowing out of NEPSE into fixed-income instruments.
Even institutional investors are gradually moving their idle funds into FDs or NRB bonds, draining liquidity from the secondary market.
Impact:
Less money in the system = fewer buyers = weak demand = falling prices.
2. Liquidity Crunch and Tight Bank Lending
Another major issue contributing to the fall of NEPSE is the liquidity crisis in the banking and financial sector. Banks and financial institutions (BFIs) are struggling to maintain the credit-deposit (CD) ratio under NRB’s limit. Consequently, banks are reluctant to issue margin loans and personal loans — two major sources of market inflow for stock trading.
Even when margin loans are given, they are highly restricted and expensive (often 12–14% annual interest). This limits the firepower of many traders and investors who rely on leverage.
On top of that, delays in disbursement and stricter risk management policies have further dried up the capital that could have gone into stocks.
Impact:
Less credit = fewer trades = declining demand for shares = drop in NEPSE index.
3. Overvaluation in Small-Cap Stocks
During bullish phases in 2020–2021, a lot of retail investors poured money into microfinance, hydropower, and non-life insurance stocks without understanding fundamentals. Many of these stocks were trading at absurdly high P/E ratios, with no underlying profit growth.
For instance, some hydropower companies were trading at 80x or even 100x earnings — far above global norms.
Now, as the market corrects and sentiment normalizes, these overvalued stocks are seeing sharp sell-offs. Investors who bought during hype are trapped, and others are hesitant to buy the dip, leading to a liquidity vacuum in small-cap segments.
Impact:
Bubble in low-quality stocks bursting = index correction = fear spreads across all sectors.
4. Weak Corporate Earnings and Deteriorating Fundamentals
A crucial factor that often goes unnoticed is the decline in quarterly earnings reported by many listed companies.
Commercial banks are facing narrowing interest margins.
Insurance companies are reporting underwriting losses due to higher claim settlements.
Hydropower companies are struggling with seasonal fluctuations and low electricity sales.
Microfinance companies face loan defaults and regulatory pressures.
Investors rely on corporate performance to justify their investments. When earnings fall short, expectations are revised downward, leading to price drops across the board.
The disconnect between stock prices and company performance during the bull run is now realigning — painfully.
Impact:
Bad earnings = low investor confidence = stock dumping = lower index levels.
5. Retail-Driven Market with No Foreign Participation
Unlike major international exchanges, NEPSE lacks strong institutional investors and foreign portfolio investments (FPIs). The market is retail-heavy, with short-term traders and small investors making up the bulk of daily volume.
This makes NEPSE extremely sensitive to rumors, fear, and herd behavior.
Even a minor negative headline or rumor can trigger panic selling, with no institutional player to absorb the volume. Foreign institutional investors generally provide stability in global markets — acting as contrarians when retail investors panic. NEPSE doesn’t have that cushion.
Also, Nepal’s regulatory barriers and lack of infrastructure for global investment make NEPSE an unattractive destination for foreign capital.
Impact:
Too much dependence on retail money = high volatility = exaggerated market corrections.
Bonus: Additional Factors to Watch
While the above five reasons are core hidden factors, several other minor contributors also exist:
Lack of new IPO excitement: Previously, IPOs drew massive liquidity. Now, oversupply and low listing gains have dulled enthusiasm.
Regulatory Uncertainty: Delays in new capital market reforms and unclear dividend taxation rules impact investor decisions.
Political Noise: Coalition instability and government inaction impact sentiment even if the economy is otherwise steady.
Currency Depreciation Concerns: Any hint of pressure on foreign reserves or exchange rates makes investors nervous.
What Should You Do as an Investor?
Instead of reacting emotionally to red charts, use this opportunity to reflect on your investment strategy:
Review your portfolio and remove speculative, low-quality stocks.
Focus on fundamentally strong companies with consistent earnings and dividends.
Continue Systematic Investment Plans (SIPs) if you’re a long-term investor.
Avoid margin trading unless you understand the risks.
Stay informed, not influenced. Ignore social media hype.
Remember: Market corrections are part of the game. Smart investors treat them as buying opportunities, not exit signals.
Conclusion
NEPSE’s fall isn’t due to one big reason. It’s a perfect storm of hidden structural issues — high interest rates, liquidity crisis, weak earnings, overvaluation, and an immature investor base. Most investors focus only on news headlines and ignore these silent killers.
If you understand these underlying dynamics, you’ll make better decisions and avoid emotional panic. Let the short-term traders chase trends — your job is to build long-term wealth.
Stay sharp, stay steady, and invest smart.