Nepal’s Money Supply (M1) Contracts Nearly 10% in One Month

Nepal’s narrow money supply (M1) — which includes currency in circulation and demand deposits — fell sharply by nearly 9.8% in August 2025, signaling a tightening liquidity environment across the financial system. According to the Nepal Rastra Bank (NRB) monetary survey, M1 declined from Rs. 1.16 trillion in mid-July to Rs. 1.04 trillion in mid-August 2025, marking one of the steepest monthly contractions in recent years.

This contraction was driven mainly by a sharp 22.8% fall in demand deposits, as businesses and individuals drew down their cash holdings to meet operating costs amid slower deposit inflows. While currency in circulation remained almost unchanged (up only 0.1%), the overall decline indicates that bank liquidity remains under stress, despite high foreign exchange reserves and stable remittance inflows.

Economists warn that such a rapid drop in M1 could tighten credit conditions, reduce short-term spending, and put pressure on small businesses already facing sluggish sales. Analysts also point to rising government cash balances (Rs. 226B) and increased development bond sales as factors that have pulled liquidity away from the private sector.

The NRB’s monetary tightening, aimed at containing inflation and stabilizing the exchange rate, appears to be cooling money circulation faster than expected. If this trend persists, experts fear it could dampen consumption and private investment, slowing down Nepal’s recovery momentum.