Monetary Policy Review 2080/81: Policy Rates Unchanged, Investor Expectations Unmet

Monetary Policy Review 2080/81: Policy Rates Unchanged, Investor Expectations Unmet

Published: 2024, Nov 29

Nepal Rastra Bank (NRB) has released the first quarterly review of the monetary policy for the fiscal year 2080/81. The review evaluates the implementation of monetary policies during the first trimester and analyses domestic and international economic conditions to project Nepal's macroeconomic outlook. The central bank has decided to maintain the policy rate, deposit collection rate, and bank rate unchanged, reflecting the continuity of its earlier monetary directives.

Policy Rates Remain Steady

According to the review report, the monetary policy rates have been maintained as follows:

• Policy Rate: 5%
• Deposit Collection Rate: 3% (lower boundary of the interest rate corridor)
• Bank Rate: 6.5% (upper boundary of the interest rate corridor).

In addition, the cash reserve ratio (CRR) and statutory liquidity ratio (SLR) remain unchanged. NRB emphasised that sustaining these monetary directions aims to stabilise prices, maintain external sector stability, and support the government's economic growth targets.

Inflation and External Reserves: Current Status

The monetary policy targets inflation around 5%. However, during the first three months of the fiscal year, average consumer inflation stood at 4.26%. Food and beverage prices increased by 7.18%, while non-food and service group prices rose by 3.49%. The year-on-year consumer price inflation for Ashwin reached 4.82%.

On the external sector, the review highlighted that foreign exchange reserves were sufficient to cover imports of goods and services for 14.5 months, exceeding the policy's minimum requirement of seven months.

Private Sector Credit and Liquidity Status

The weighted average interbank rate among banks and financial institutions was recorded at 3% during the first quarter. Projections for broad money (M2) and private sector credit growth were set at 12% and 12.5%, respectively. However, as of Ashwin-end, the broad money supply increased by 13.3%, while credit to the private sector grew by 6.2%.

Investor Expectations and Market Impact

Unrealized Investor Demands

Investors in Nepal's stock market had anticipated key reforms in the monetary policy review, including:

1. Flexibility in Personal Loan Limits for Stock Investments: Raising or eliminating the individual borrowing limit of NPR 15 crores.
2. Reduction in Risk Weightage for Stock Loans: Reducing the current 125% risk weightage applied to loans above NPR 50 lakhs.
3. Facilitating Bank Investments in Stocks: Simplifying procedures for banks to invest in stocks.

Despite sufficient liquidity in the banking sector, investor expectations for these adjustments went unmet. Analysts believe this decision missed an opportunity to boost investor confidence and the stock market's momentum.

Stakeholder Reactions

Tulsiram Dhakal, Chairman of Nepal Investors Forum, expressed disappointment over the unchanged personal loan cap of NPR 15 crores for individual investors. He argued that this limitation restricts potential market growth despite a lack of significant credit expansion in the banking sector. According to Dhakal, lifting or easing this cap could have bolstered investor trust without exacerbating credit flows significantly.

Market analyst Subash Chandra Dhungana noted that NRB's cautious approach was unsurprising, as substantial changes are rarely introduced in the first quarterly review. However, he acknowledged that easing restrictions, even marginally, could have positively influenced the market sentiment.

Stock Loans and Risk Weightage

Currently, stock loans carry a 125% risk weightage for amounts exceeding NPR 50 lakhs, while loans under this threshold are weighted at 100%. Investor demands for uniformity at 100% risk weightage were not addressed in the review. Critics argue that stock loans are less risky compared to real estate loans due to the liquidity of shares, which can be converted into cash within three days.

As of Ashwin-end, banks and financial institutions had disbursed NPR 105.82 billion in stock loans, with the largest share—NPR 69.97 billion—comprising loans above NPR 1 crore.

Market Outlook: Short-term Volatility Expected

Immediate Impacts

Following the review, the stock market reacted negatively, declining by 8 points on Thursday as investors adjusted their expectations. Analysts predict the market may experience additional selling pressure on Sunday, particularly from disappointed investors.

Dhungana stated, “Despite the lack of favourable changes, the review does not introduce significant challenges for the stock market. The short-term dip could provide buying opportunities for long-term investors.”

Mid-term Projections

Market observers remain optimistic about the broader outlook, citing falling interest rates, sufficient liquidity, and strong external indicators as supportive factors. Dhakal opined, “Although NRB's inflexibility is a point of criticism, the market will recover swiftly due to robust underlying conditions.”

Conclusion

Nepal Rastra Bank’s first quarterly review of the monetary policy reflects a cautious stance, opting for stability over reform. While this approach aims to sustain macroeconomic balance, it has fallen short of addressing key investor concerns. The immediate market impact is expected to be temporary, with recovery anticipated as favorable economic indicators continue to support long-term growth.