Monetary Policy Impact on Interest Rates in Nepal (2025/26)
The Nepal Rastra Bank's monetary policy decisions directly shape interest rates across the economy. In FY 2025/26, the NRB made a notable policy shift — first easing in December 2025, then tightening from January 2026. Here's how policy rates transmit to market rates.
NRB's Policy Rate Corridor
The NRB operates an interest rate corridor system:
- Floor: Fixed Deposit Collection Rate — 2.75% (Aug-Dec) → 3.0% (Jan-Mar)
- Policy Rate: Repo Rate — 4.5% → 4.25% (Dec) → 5.0% (Jan-Mar)
- Ceiling: Standing Liquidity Facility — 7.0% → 5.75% (Dec) → 6.5% (Jan-Mar)
Transmission to Market Rates
| Rate Type | Dec 2025 (Low) | Mar 2026 (Current) | Change |
|---|---|---|---|
| NRB Repo Rate | 4.25% | 5.00% | +0.75% |
| CB Deposit Rate | 3.66% | 4.54% | +0.88% |
| CB Lending Rate | 7.26% | 8.40% | +1.14% |
| Interbank Rate | 2.74% | 3.00% | +0.26% |
Key Observations on Transmission
1. Lending rates moved more than deposit rates: CB lending rates rose 1.14% vs deposit rates rising 0.88% — banks passed through more to borrowers than to depositors, widening the spread.
2. Interbank moved least: Only +0.26% — system liquidity remains ample, so banks don't compete aggressively for interbank funds.
3. Immediate transmission: January saw the sharpest jump — lending rates went from 7.26% to 8.69% in a single month, showing Nepal's banking system responds quickly to NRB signals.
Why NRB Tightened
- CPI inflation accelerated from 1.11% (Nov) to 3.62% (Mar)
- Exchange rate depreciation (NPR weakened to 147.94/USD) adding import cost pressure
- NRB wanted to normalize from the excessively easy stance of the first half
What This Means for the Economy
- Home loans, auto loans, business loans all more expensive
- Fixed deposits becoming more attractive for savers
- Equity market faces headwinds from higher discount rates
- Government borrowing costs rising — Development Bond yields likely to increase
Conclusion
NRB's monetary policy has powerful and rapid transmission to market interest rates. The 0.75% repo hike in January translated to 1.14% higher lending rates by March. With inflation still above 3%, the tightening bias is likely to persist into the second half of FY 2025/26.