Exchange Rate and Foreign Investment Trends in NEPSE

The exchange rate of the Nepalese rupee (NPR) and the trend of foreign investment play a crucial role in shaping the valuation, liquidity, and sentiment of the Nepal Stock Exchange (NEPSE). These two macroeconomic factors define how international capital interacts with Nepal’s financial system and how external economic conditions influence domestic stock performance.

The exchange rate, particularly the NPR’s peg with the Indian rupee (1 INR = 1.6 NPR) and its floating value against the US dollar, directly affects company fundamentals in sectors like banking, manufacturing, hydropower, and import-oriented businesses. When the NPR depreciates (weakens), imported raw materials, fuel, and machinery become expensive, increasing production costs and reducing corporate profitability. This leads to lower Earnings Per Share (EPS) and weaker stock valuations. Conversely, a stable or appreciating NPR reduces import costs, supports corporate margins, and boosts investor confidence. Export-oriented or remittance-linked sectors often benefit from a weaker currency because their foreign earnings increase when converted into NPR.

The foreign investment trend in Nepal is still limited due to strict regulatory controls. As per the Nepal Rastra Bank (NRB) and the Ministry of Industry, foreign investors cannot freely buy or sell shares on NEPSE. Instead, most foreign capital enters Nepal through Foreign Direct Investment (FDI) in hydropower, infrastructure, manufacturing, telecom, and tourism sectors. Although indirect, this inflow enhances the country’s foreign exchange reserves and economic confidence, which positively influences market sentiment and valuations in related listed companies.

Exchange rate stability is also vital for foreign investor perception. High volatility discourages foreign participation as it adds exchange risk to returns. A predictable currency rate helps foreign investors estimate long-term profitability and valuation consistency. Moreover, when the US dollar strengthens globally, Nepal faces higher import bills and inflation pressure, prompting the NRB to maintain tight monetary policy — which indirectly limits liquidity in the stock market.

From a fundamental analysis perspective, both exchange rate and foreign investment affect the cost of capital, corporate margins, and discount rates used in stock valuation. When foreign inflows are healthy and currency risk is low, the Price-to-Earnings (P/E) ratios of companies tend to rise, reflecting investor optimism. However, if the rupee weakens significantly or foreign investments slow down, NEPSE often witnesses valuation corrections and bearish sentiment.

According to Sandeep Kumar Chaudhary, Nepal’s leading Technical and Fundamental Analyst and founder of the NepseTrading Training Institute, “Exchange rate and foreign investment act like the external heartbeat of NEPSE. Currency stability builds confidence, while foreign inflows provide strength and momentum to the market.” With over 15 years of banking experience and 10,000+ trained investors, he emphasizes that professional investors must watch exchange rate data, NRB reserves, and FDI trends to forecast long-term market direction.