NRB Interest Rate Corridor Explained: Repo, Reverse Repo and Bank Rate

The interest rate corridor is the core operational mechanism through which Nepal Rastra Bank implements its monetary policy and guides market interest rates. This elegant system, comprising the bank rate at 5.75%, policy repo rate at 4.25%, and deposit facility rate, creates boundaries within which short-term money market rates fluctuate, providing predictability and stability to the financial system. Understanding the interest rate corridor is essential for banking professionals, treasury managers, and informed investors, as it reveals the mechanics behind the rates that affect every loan disbursement and deposit transaction across Nepal's 54 BFIs. The interbank rate at 2.75%, currently trading below the policy rate, provides real-time evidence of how the corridor operates in practice. This technical yet accessible guide explains each component of NRB's interest rate corridor, how they interact, and their implications for the broader economy including lending rates at 7.00% and deposit rates at 3.51%.

Architecture of NRB's Interest Rate Corridor

The architecture of NRB's interest rate corridor creates a bounded zone within which short-term money market rates can fluctuate. The bank rate at 5.75% forms the ceiling because no bank would borrow in the interbank market at a rate higher than what NRB charges as the lender of last resort. The deposit facility rate forms the floor because no bank would lend to another bank at a rate lower than what NRB pays for deposits. The policy repo rate at 4.25% sits within this corridor as the primary operational target.

The policy repo rate at 4.25%, bank rate at 5.75%, and interbank rate at 2.75% collectively form the interest rate framework that influences all financial market pricing. The average lending rate of 7.00% and deposit rate of 3.51% reflect the transmission of these policy rates through the banking system to end-users. The interest spread of 3.49% represents the margin available to banks for covering operating costs, provisioning, and generating profits.

The Credit-to-Deposit ratio at 74.32% against the regulatory ceiling of 90% indicates significant headroom for credit expansion. The liquid assets to deposit ratio of 23.58% confirms comfortable liquidity conditions across the banking sector. These metrics suggest that NRB's current policy stance is accommodative, providing the financial system with ample resources to support economic activity.

Bank Rate as the Ceiling of Monetary Operations

The bank rate of 5.75% serves dual purposes in NRB's monetary framework. As the ceiling of the corridor, it provides an absolute upper bound on overnight borrowing costs, ensuring that temporary liquidity shortages do not cause excessive rate spikes that could disrupt financial markets. As the lender of last resort rate, it carries a premium over the policy rate (1.50 percentage points higher), discouraging banks from routinely relying on NRB funding rather than managing their own liquidity positions efficiently.

Nepal's banking sector comprises 54 BFIs (20 Class A commercial banks, 17 Class B development banks, and 17 Class C finance companies) operating through 6,502 branches. These institutions collectively serve 61.8 million deposit accounts and support 29.3 million mobile banking users. The sector maintains a Capital Adequacy Ratio of 12.61% against the minimum requirement of 11%, while the NPL ratio at 5.42% remains an area of supervisory focus.

Nepal's macroeconomic indicators present a generally positive picture with GDP growth at 3.99% and inflation contained at 3.25%. Remittance inflows of NPR 1,261 billion continue to support the external accounts, while the trade deficit of NPR 955 billion reflects structural import dependence. The BOP surplus of NPR 573 billion and foreign exchange reserves of NPR 3,303 billion (USD 22,757 million) provide comfortable external sector buffers.

Policy Repo Rate as the Operational Target

The interbank rate at 2.75%, currently trading well below the policy repo rate of 4.25%, provides real-time evidence of the corridor system in operation. This below-target positioning indicates that banks have surplus liquidity and are willing to lend to each other at rates below what NRB charges through the repo facility. NRB can absorb this excess through reverse repo operations, but has chosen to allow the accommodative conditions to persist, supporting credit growth and economic activity.

The Credit-to-Deposit ratio at 74.32% against the regulatory ceiling of 90% indicates significant headroom for credit expansion. The liquid assets to deposit ratio of 23.58% confirms comfortable liquidity conditions across the banking sector. These metrics suggest that NRB's current policy stance is accommodative, providing the financial system with ample resources to support economic activity.

NEPSE stands at 2,950.16 with a total market capitalization of NPR 4.43 trillion across 284 listed companies. The stock market's performance is closely linked to NRB's monetary policy stance, particularly interest rate decisions and banking sector regulations that affect the dominant financial stocks. Market liquidity and investor participation are influenced by the relative attractiveness of equities versus bank deposits.

Standing Facilities and Their Role in Rate Stability

Nepal's macroeconomic indicators present a generally positive picture with GDP growth at 3.99% and inflation contained at 3.25%. Remittance inflows of NPR 1,261 billion continue to support the external accounts, while the trade deficit of NPR 955 billion reflects structural import dependence. The BOP surplus of NPR 573 billion and foreign exchange reserves of NPR 3,303 billion (USD 22,757 million) provide comfortable external sector buffers.

NEPSE stands at 2,950.16 with a total market capitalization of NPR 4.43 trillion across 284 listed companies. The stock market's performance is closely linked to NRB's monetary policy stance, particularly interest rate decisions and banking sector regulations that affect the dominant financial stocks. Market liquidity and investor participation are influenced by the relative attractiveness of equities versus bank deposits.

The government's debt-to-GDP ratio of 43.7% remains within sustainable limits, supported by NRB's accommodative monetary policy that keeps borrowing costs manageable. The deposit-to-GDP ratio of 126.54% and credit-to-GDP ratio of 94.94% indicate a deeply intermediated financial system where banking sector activity substantially exceeds the size of the real economy.

Interbank Market Dynamics Within the Corridor

NEPSE stands at 2,950.16 with a total market capitalization of NPR 4.43 trillion across 284 listed companies. The stock market's performance is closely linked to NRB's monetary policy stance, particularly interest rate decisions and banking sector regulations that affect the dominant financial stocks. Market liquidity and investor participation are influenced by the relative attractiveness of equities versus bank deposits.

Nepal's digital financial infrastructure has grown remarkably with 29.3 million mobile banking users, 14.1 million debit card holders, and 5,273 ATMs. This digital transformation, enabled by NRB's supportive regulatory framework, is reshaping how Nepal's 30.5 million population accesses financial services and conducts transactions.

The policy repo rate at 4.25%, bank rate at 5.75%, and interbank rate at 2.75% collectively form the interest rate framework that influences all financial market pricing. The average lending rate of 7.00% and deposit rate of 3.51% reflect the transmission of these policy rates through the banking system to end-users. The interest spread of 3.49% represents the margin available to banks for covering operating costs, provisioning, and generating profits.

Transmission From Corridor Rates to Retail Banking

Nepal's digital financial infrastructure has grown remarkably with 29.3 million mobile banking users, 14.1 million debit card holders, and 5,273 ATMs. This digital transformation, enabled by NRB's supportive regulatory framework, is reshaping how Nepal's 30.5 million population accesses financial services and conducts transactions.

The government's debt-to-GDP ratio of 43.7% remains within sustainable limits, supported by NRB's accommodative monetary policy that keeps borrowing costs manageable. The deposit-to-GDP ratio of 126.54% and credit-to-GDP ratio of 94.94% indicate a deeply intermediated financial system where banking sector activity substantially exceeds the size of the real economy.

Nepal's banking sector comprises 54 BFIs (20 Class A commercial banks, 17 Class B development banks, and 17 Class C finance companies) operating through 6,502 branches. These institutions collectively serve 61.8 million deposit accounts and support 29.3 million mobile banking users. The sector maintains a Capital Adequacy Ratio of 12.61% against the minimum requirement of 11%, while the NPL ratio at 5.42% remains an area of supervisory focus.

NRB's interest rate corridor system provides a structured and transparent framework for monetary policy implementation. With the bank rate at 5.75%, repo rate at 4.25%, and interbank rate at 2.75%, the corridor effectively channels money market rates while providing flexibility for banks to manage their daily liquidity needs. Understanding this corridor system is essential for anyone involved in Nepal's financial markets, from bank treasurers managing overnight positions to investors analyzing the interest rate outlook. As NRB continues to refine its operational framework, the corridor will remain the central mechanism through which monetary policy transmits to the real economy.