Base Rate Trends: Banking Sector Competition and Margins

Published on September 24, 2025

The base rate, which represents the minimum interest rate below which commercial banks cannot lend, is a critical benchmark for credit pricing and banking sector competition. In Nepal, base rates have seen wide fluctuations in recent years, shaped by liquidity cycles, remittance inflows, and monetary policy. After climbing to 9.54% in FY 2021/22 and further to 10.03% in FY 2022/23 during a period of tight liquidity and high inflation, the base rate dropped to 8.00% in FY 2023/24 and fell sharply to 6.02% in FY 2024/25. By mid-August 2082/83 (2025/26), the base rate had moderated further to 5.78%, marking the lowest level in years.

This steady decline in base rates is reshaping Nepal’s banking competition and margins. On one hand, lower base rates make credit more affordable for borrowers, intensifying competition among banks to attract clients with attractive lending products. Sectors such as hydropower, construction, SMEs, and consumer credit stand to benefit from cheaper financing options. On the other hand, lower base rates also compress banks’ profit margins, particularly when deposit rates remain above 4%. The narrowing spread between lending and deposit rates (which peaked at over 4% in FY 2022/23 but has since narrowed significantly) puts pressure on banks’ profitability.

At the systemic level, declining base rates reflect ample liquidity supported by remittance inflows, a current account surplus, and record-high foreign exchange reserves. With inflation cooling to just 1.68% in mid-August 2082/83, banks are under less pressure to maintain high lending benchmarks. However, the challenge is that even with lower base rates, private sector credit growth remains modest (7.7% in mid-August 2082/83), showing that demand-side constraints and business caution continue to weigh on loan expansion.

Looking forward, base rate dynamics will play a key role in determining the balance between competitiveness and stability in Nepal’s banking sector. If rates stay low, borrowers will benefit and investment may pick up, but banks will need to innovate—by cutting costs, diversifying services, or expanding fee-based income—to protect margins. Policymakers must also ensure that aggressive competition does not lead to risky lending practices or asset quality deterioration.

Policy Lessons from India: Can Nepal Control Inflation More Effectively?

India has kept inflation relatively moderate through strong agricultural systems, buffer stocks, and inflation-targeting policies, while Nepal has historically struggled with food-driven volatility. Nepal’s CPI fell below India’s in 2025/26 for the first time in four years, but to sustain this trend, Nepal must strengthen supply chains, adopt buffer policies, and set clearer inflation targets.

Inflation Convergence in South Asia: What Nepal-India CPI Data Reveals

Nepal and India’s inflation rates, once far apart, have gradually converged—Nepal’s CPI dropping from 7.74% in 2022/23 to 1.68% in 2025/26, while India’s remained steadier around 2–5%. For the first time in four years, Nepal’s inflation fell below India’s, highlighting both shared regional cycles and unique domestic vulnerabilities.

Nepal vs India: Monthly CPI Comparison and Regional Economic Impact

Nepal’s inflation fell to 1.68% in August 2025/26, below India’s 2.07%, reversing a four-year trend. While both economies share similar seasonal inflation cycles, Nepal’s sharper food-driven spikes contrast with India’s steadier, monsoon-driven patterns. Regionally, this convergence impacts household costs, trade competitiveness, and economic stability.

Inflation Gap Narrows: Nepal’s Deviation with India Falls to -0.39% in 2025/26

In August 2025/26, Nepal’s CPI stood at 1.68%, lower than India’s 2.07%, with the inflation deviation dropping to -0.39% for the first time in four years. While Nepal gained from falling food prices, India’s inflation stayed higher due to agricultural pressures, though both countries continue to face rising service costs.

Cross-Border Inflation Trends: How Nepal and India’s Prices Move Together and Apart

Nepal and India’s inflation trends usually move in sync, reflecting shared regional and global factors. But in August 2025/26, Nepal’s inflation (1.68%) fell below India’s (2.07%) for the first time in four years, thanks to easing food prices in Nepal, while India faced higher agricultural pressures.

Nepal vs India Inflation 2025/26: Why Nepal’s CPI Fell Below India’s for the First Time

In August 2025/26, Nepal’s inflation dropped to 1.68%, falling below India’s 2.07% for the first time in four years. While food price declines drove Nepal’s slowdown, India’s inflation held slightly higher due to agricultural pressures. However, Nepal’s service costs remain a long-term challenge, even as headline CPI looks favorable.