Money Multiplier (M2) Expands to 7.16, Showing Improved Liquidity in Nepal’s Banking System

According to the latest Monetary Survey published by the Nepal Rastra Bank (NRB), Nepal’s money multiplier for broad money (M2) increased to 7.16 in mid-September 2025 from 6.78 two months earlier, reflecting improved liquidity efficiency across the financial system.

Improved Liquidity Circulation

The rise of the M2 multiplier signals that commercial banks are creating more deposit money per unit of base money, highlighting enhanced liquidity circulation. Broad money (M2) itself grew modestly by 0.3 percent to Rs 7.87 trillion, supported by an expansion in net foreign assets (+5.8 percent), while domestic credit growth remained measured.

Drivers Behind the Multiplier Growth

NRB’s data show that higher remittance inflows and robust foreign-exchange reserves strengthened banks’ capacity to expand deposit bases without aggressive credit creation. Saving and call deposits increased by 4.5 percent, indicating depositor confidence, whereas time deposits decreased slightly by 0.5 percent. These shifts raised the overall deposit-to-reserve ratio, thereby elevating the multiplier.

Meanwhile, the narrow-money (M1) multiplier dipped marginally to 0.964, suggesting limited short-term transaction demand—an outcome of cautious consumer spending and restrained business outlays. However, the combination of a higher M2 multiplier and a stable M1+ multiplier (3.96) implies that the banking system maintained healthy liquidity transformation efficiency.

Monetary and Policy Implications

Economists interpret the higher M2 multiplier as evidence that the banking system is utilizing available reserves more effectively, enhancing credit potential without risking liquidity shortages. With foreign reserves rising and government deposits accumulating, NRB’s balanced policy stance has maintained macro-monetary stability while ensuring adequate liquidity for growth sectors.

The multiplier growth aligns with NRB’s objective to stabilize money supply while fostering productive lending, providing the economy with resilience amid global uncertainties.