Liquidity Situation and Credit Flow – A Fundamental Perspective

The liquidity situation and credit flow are the lifeblood of Nepal’s financial system and play a decisive role in shaping the fundamentals of the Nepal Stock Exchange (NEPSE). These two indicators determine how easily money circulates through banks, businesses, and investors — ultimately influencing stock prices, sectoral performance, and overall market sentiment. In simple terms, when liquidity is high, markets rise; when liquidity is tight, markets slow down.

Liquidity refers to the availability of loanable funds in the banking and financial sector. When deposit growth is strong and interbank rates remain low, banks have sufficient money to lend. This easy liquidity allows businesses to expand operations, individuals to invest, and traders to borrow against shares (margin lending). As a result, corporate earnings increase, and NEPSE valuations rise. Conversely, when liquidity tightens due to higher credit demand, reduced deposits, or strict NRB policies, banks limit lending — leading to reduced investment activity and bearish sentiment in NEPSE.

The Credit-to-Deposit (CD) ratio and interbank interest rate are two crucial indicators that reflect liquidity health. A CD ratio below 85% usually signals good liquidity, while above 90% indicates tightness in the system. Likewise, a rising interbank rate (above 4–5%) shows banks are competing for funds, which squeezes lending and weakens market momentum. NRB’s monetary policies — such as CRR (Cash Reserve Ratio) and policy rate adjustments — directly affect liquidity and thus stock market behavior.

In recent years, Nepal’s liquidity condition has fluctuated sharply due to changes in remittance inflows, government spending delays, and foreign reserve trends. When government capital expenditure slows down or remittance inflows weaken, money gets locked within the banking system, restricting credit flow. Similarly, during festive or fiscal year-end periods, businesses withdraw large amounts for payments, temporarily tightening liquidity. Such cycles directly impact NEPSE as investor participation correlates strongly with money supply.

For fundamental investors, tracking NRB’s daily banking indicators — such as total deposits, total loans, interbank rate, and CD ratio — provides early insight into market direction. Liquidity surplus periods often trigger bullish runs, while prolonged credit crunches precede market corrections.

According to Sandeep Kumar Chaudhary, Nepal’s leading Technical and Fundamental Analyst and founder of the NepseTrading Training Institute, “Liquidity is the oxygen of the stock market. Without it, even fundamentally strong companies struggle to perform.” With over 15 years of banking experience and having trained 10,000+ students, he teaches investors how to interpret NRB’s liquidity data to anticipate market shifts before they appear on charts.