Monetary Expansion Impact on Inflation in Nepal (2025/26)
The relationship between money supply growth and inflation is a cornerstone of monetary economics. In Nepal's FY 2025/26, M2 grew ~7% while average CPI inflation was 2.13% — but the dynamic is more nuanced than these headline numbers suggest.
The Numbers
| Metric | Value |
|---|---|
| M2 Growth | ~7% (Rs. 528,970M) |
| CPI Inflation (8M avg) | 2.13% |
| CPI Inflation (March 2026) | 3.62% |
| GDP Growth | 3.99% |
| Private Credit Growth | ~5% |
| Foreign Asset Growth | Rs. +658,349M |
Why M2 Growth Hasn't Caused Higher Inflation (Yet)
1. Remittance-driven, not credit-driven: M2 is growing because of foreign asset accumulation (remittances), not domestic credit expansion. Remittance money often goes into savings and real estate rather than immediate consumption, delaying inflationary impact.
2. Velocity of money: If the newly created money circulates slowly (saved rather than spent), its inflationary impact is muted. Nepal's high savings rate from remittances suggests lower velocity.
3. Output gap: With GDP growing at 3.99%, the economy has capacity to absorb some monetary expansion without price pressures.
But the Lag Effect Is Showing
Inflation accelerated from 1.11% (November) to 3.62% (March) — a sharp rise coinciding with M2 expansion. While food prices and seasonal factors play a role, the monetary backdrop of 7% M2 growth creates a permissive environment for inflation. The lag between money supply expansion and inflation is typically 6-12 months, meaning the full impact of recent M2 growth may not be felt until mid-2026.
NRB's Response
The NRB raised the repo rate from 4.25% to 5.0% in January 2026, signaling awareness of the inflation risk. By tightening credit conditions, the NRB aims to slow the velocity of money and moderate demand-side pressures even as foreign-driven M2 growth continues.
Conclusion
Nepal's monetary expansion of ~7% is currently manageable with inflation at 2-3.6%. However, the accelerating inflation trend and lag effects suggest the NRB must remain vigilant. The unusual composition of M2 growth (foreign assets rather than credit) provides some buffer, but sustained expansion without productivity gains will eventually feed into higher prices.