Nepal Rastra Bank Governor Calls for Balanced Monetary Policy to Support High Growth Targets

Nepal Rastra Bank Acting Governor Kiran Pandit has emphasized that the upcoming monetary policy must strike a delicate balance: supporting the government's high economic growth targets while maintaining financial stability. Speaking at an event organized by the Society of Economic Journalists-Nepal in Kathmandu, Pandit underscored the inherent link between fiscal and monetary policies and the challenge of coordinating them to ensure they remain complementary rather than conflicting.

Key Takeaways from the Governor's Address

Pandit's remarks come at a pivotal moment for Nepal's economy, where the central bank aims to foster growth without compromising price stability. The core message is clear: the next monetary policy must be calibrated to support ambitious economic goals while safeguarding the financial system.

The Fiscal-Monetary Policy Link

One of the most significant points raised by Pandit is the intrinsic connection between fiscal and monetary policies. He noted that effective coordination between these two pillars is essential for achieving sustainable economic growth. Without alignment, policies could work against each other, undermining the government's efforts to boost the economy.

Challenges in Policy Coordination

Pandit highlighted the inherent difficulty in ensuring that fiscal and monetary policies complement each other. The challenge lies in designing policies that are not only individually sound but also mutually reinforcing. This requires careful planning, transparent communication, and a shared vision between the government and the central bank.

Current Monetary Policy Context

As of February 2026, Nepal Rastra Bank has set the policy repo rate at 4.25%, with the bank rate at 5.75% and the interbank rate at 2.75%. The central bank operates through an interest rate corridor system that guides short-term money market rates and influences broader lending and deposit rates across the banking sector.

Interest Rate Corridor System

The current policy repo rate of 4.25% serves as the benchmark for interbank lending. The bank rate, set at 5.75%, represents the rate at which Nepal Rastra Bank lends to commercial banks as a lender of last resort. Meanwhile, the interbank rate at 2.75% reflects the actual cost of overnight funds in the market, indicating surplus liquidity conditions in the banking system.

Liquidity Management Tools

Nepal Rastra Bank employs several instruments to manage liquidity, including the repo facility, reverse repo facility, Open Market Operations (OMO), Cash Reserve Ratio (CRR), and Statutory Liquidity Ratio (SLR). These tools help maintain price stability while supporting economic growth, a dual mandate that requires careful calibration of monetary policy instruments.

Future Outlook and Expectations

The upcoming monetary policy for FY 2026/27 is expected to reflect the central bank's commitment to maintaining price stability while supporting economic growth. Pandit's address signals a strong intention to align monetary policy with the government's high growth targets, ensuring that fiscal and monetary policies work in harmony.

Market Impact

The central bank's calibrated approach aims to balance the dual objectives of supporting economic growth and maintaining price stability. The spread between the policy rate and bank rate provides a penalty mechanism that discourages banks from relying excessively on central bank funding, promoting a more resilient banking sector.

Credit Expansion Potential

The Credit-to-Deposit (CD) ratio stands at 74.32% against the regulatory ceiling of 90%, indicating that banks have substantial room to expand their credit portfolios. This potential for credit expansion could further support economic growth, provided that monetary policy remains supportive and stable.

Conclusion

Kiran Pandit's emphasis on the need for complementary fiscal and monetary policies underscores the importance of coordinated efforts to achieve Nepal's high economic growth targets. As the central bank prepares to announce its next monetary policy, the focus will be on ensuring that these policies work together to foster sustainable growth while maintaining financial stability.