Narrow Money Rebounds: What Does It Signal About Confidence?

Narrow money (M1)—which includes currency in circulation and demand deposits—is often seen as a reflection of immediate liquidity and household/business confidence in the financial system. In Nepal, its growth trends over the past few years have been highly volatile, signaling fluctuating confidence. After expanding by 22.8% in FY 2020/21, narrow money growth collapsed to -9.3% in FY 2021/22, reflecting a severe liquidity crunch, rising imports, and tight monetary policy. The slowdown persisted in FY 2022/23, when M1 grew by only 1.2%, and further worsened in FY 2023/24 with a contraction of -1.7%, suggesting households and businesses preferred holding cash or diverting funds to cover rising costs rather than keeping them in the banking system.

However, in FY 2024/25, narrow money rebounded strongly by 22%, and by mid-August 2082/83 (2025/26), it grew another 17.3% year-on-year. This sharp recovery is a signal of renewed confidence in the banking system and improved liquidity conditions. Several factors explain this turnaround: record-high remittance inflows, which flowed directly into bank deposits; easing inflation (down to 1.68% in mid-August 2082/83), which boosted real deposit returns; and improved stability in interest rates, with commercial bank deposit rates averaging around 4–5%. The rebound also reflects reduced panic-driven cash hoarding by households, who now feel more secure keeping their money in banks.

From a policy perspective, this rebound in M1 is encouraging, as it indicates that households and businesses are once again trusting formal financial channels. This enhances the ability of banks to mobilize deposits and extend credit, supporting investment and consumption. However, the challenge remains in ensuring that this renewed confidence translates into higher productive credit growth. While liquidity is flowing back into banks, private sector credit growth is still subdued (6.5–7.7% range in mid-August 2082/83), highlighting a cautious business environment.

In short, narrow money’s rebound signals stronger confidence and financial stability, but it must be accompanied by policies that encourage banks to channel deposits into productive sectors. Otherwise, the risk is that these funds remain underutilized, providing liquidity comfort but limited impact on long-term growth.