Exchange Rate vs Inflation Nepal 2026: Are They Connected?
Two key economic trends are converging in Nepal in 2025/26: a weakening currency (NPR at 147.94/USD in March 2026) and rising inflation (CPI at 3.62%). This analysis examines the relationship between exchange rate movements and consumer price inflation using NRB data.
The Two Trends Side by Side
| Month | NRs/USD (Mid-Month) | CPI Inflation (YoY) |
|---|---|---|
| Aug 2025 | 140.09 | 1.68% |
| Sep | 141.14 | 1.87% |
| Oct | 140.52 | 1.47% |
| Nov | 142.00 | 1.11% |
| Dec | 144.67 | 1.63% |
| Jan 2026 | 144.31 | 2.42% |
| Feb | 145.13 | 3.25% |
| Mar | 147.94 | 3.62% |
The Exchange Rate-Inflation Pass-Through
When NPR weakens, imported goods become more expensive in rupee terms. Since Nepal imports 87% of its total trade volume, this exchange rate pass-through is significant:
- Petroleum: Priced in USD — a weaker NPR directly increases fuel costs, affecting transport and production
- Food imports: Rice, vegetables, edible oil from India — INR costs pass through to consumers
- Consumer goods: Electronics, medicines, vehicles all become pricier
Correlation Analysis
From August to November 2025, the exchange rate depreciated moderately (140→142) while inflation actually fell (1.68%→1.11%). But from December to March, as depreciation accelerated (144→148), inflation surged (1.63%→3.62%). This suggests a lagged pass-through effect — exchange rate changes take 1-2 months to fully impact consumer prices.
Other Inflation Drivers
Exchange rates are not the sole driver. Other factors include seasonal food supply patterns, festival demand, government administered prices (petroleum pricing), and monetary policy. The rising inflation in Jan-Mar also coincides with seasonal demand increases in Nepal's economy.
Conclusion
There is a clear relationship between NPR depreciation and rising inflation in Nepal, though the effect is lagged. With the exchange rate at historic highs and inflation accelerating, policymakers need to monitor the pass-through closely. If NPR continues weakening, inflation could breach 4-5% by mid-2026.