⏱ 4 min read
Monetary policy is how Nepal Rastra Bank controls the amount of money, credit and interest rates in the economy to keep prices stable and support growth. Bank exams and Lok Sewa papers ask about its objectives, tools such as CRR and repo, the interest rate corridor and the difference between monetary and fiscal policy. This note explains all of these simply.
1. Meaning and objectives
- Monetary policy is the policy of the central bank to control money supply, credit and interest rates.
- In Nepal it is made by Nepal Rastra Bank, announced every year near the start of the fiscal year, with a mid-term review.
- Main objectives: price stability (controlling inflation), balance of payments stability, financial stability and support for economic growth.
| Expansionary policy | Contractionary policy |
|---|---|
| Increases money and credit | Reduces money and credit |
| Lower interest rates, lower CRR | Higher interest rates, higher CRR |
| Used in slowdown or recession | Used to control high inflation |
2. Quantitative (general) tools
| Tool | How it works |
|---|---|
| Policy rate / bank rate | Rate at which the central bank lends to banks; a higher rate makes loans costlier |
| CRR (Cash Reserve Ratio) | Share of deposits banks must keep with NRB as cash; higher CRR reduces lending |
| SLR (Statutory Liquidity Ratio) | Share of deposits banks must keep in liquid assets such as government securities |
| Open market operations (OMO) | Buying or selling government securities to add or remove liquidity |
| Repo | NRB lends money to banks against securities for a short time (injects liquidity) |
| Reverse repo | NRB borrows from banks (absorbs extra liquidity) |
3. Qualitative (selective) tools
- Credit ceilings and margin requirements on certain loans (e.g. share loans, real estate).
- Directed lending: banks must lend a minimum share to priority sectors such as agriculture, energy and small enterprises.
- Moral suasion: persuading banks through advice and meetings.
- Loan-to-value limits on housing and vehicle loans.
4. Interest rate corridor (IRC)
- NRB introduced the interest rate corridor in its monetary policy of 2073/74 BS to keep short-term interest rates stable.
- Upper limit (ceiling): the Standing Liquidity Facility (SLF) rate, at which banks can borrow from NRB.
- Middle: the policy rate (repo rate).
- Lower limit (floor): the deposit collection rate, at which NRB absorbs extra money from banks.
- The interbank rate is expected to move within this corridor.
5. Money supply and fiscal policy
| Measure | Includes |
|---|---|
| M1 (narrow money) | Currency held by the public + demand (current) deposits |
| M2 (broad money) | M1 + time deposits (saving and fixed) |
| Monetary policy | Fiscal policy |
|---|---|
| Made by Nepal Rastra Bank | Made by the Ministry of Finance (government) |
| Tools: interest rates, CRR, OMO | Tools: taxes, public spending, borrowing |
| Announced in the monetary policy statement | Announced in the budget |
6. How monetary policy affects daily life
| NRB action | Effect on banks | Effect on people |
|---|---|---|
| Raises the policy rate | Borrowing from NRB costs more | Loan interest rises; borrowing slows |
| Raises CRR | Less money to lend | Fewer new loans |
| Reverse repo | Extra liquidity absorbed | Prices rise more slowly |
| Repo or lowering rates | More liquidity | Cheaper loans, more investment |
| Directed lending | Credit to priority sectors | More loans for agriculture, energy, small business |
7. Monetary policy and fiscal policy
- Monetary policy is made by Nepal Rastra Bank; fiscal policy by the Ministry of Finance.
- Monetary tools work through money and interest rates; fiscal tools through taxes and spending.
- Both aim for growth with stable prices, so they must work together.
- NRB announces monetary policy after the budget, usually in Shrawan.
8. How this topic is asked in the exam
Objective items ask the tools of monetary policy, the interest rate corridor rates and the difference between monetary and fiscal policy. Subjective questions ask how monetary policy controls inflation. Use the table above to link each tool to its effect.
📌 Key points to remember
- Monetary policy is made by NRB to control money, credit and interest rates.
- Objectives: price stability, BoP stability, financial stability, growth.
- Expansionary policy adds money; contractionary policy reduces it.
- Quantitative tools: policy rate, CRR, SLR, OMO, repo and reverse repo.
- Qualitative tools: credit ceilings, margin requirements, directed lending, moral suasion.
- Interest rate corridor (2073/74): SLF rate ceiling, policy rate middle, deposit collection rate floor.
- M1 = currency + demand deposits; M2 = M1 + time deposits.
- Fiscal policy (taxes, spending) is made by the Ministry of Finance in the budget.
📝 Quiz
Test yourself: Monetary Policy of Nepal
20 questions on Meaning and objectives, Qualitative (selective) tools and Money supply and fiscal policy.
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