Nepal Rastra Bank and Monetary Policy

Overview

Nepal Rastra Bank (NRB) was established in 1956 under the Nepal Rastra Bank Act, 1955. It now works under the Nepal Rastra Bank Act, 2058 (2002).

Objectives (Section 4)

1. Formulate and manage monetary and foreign exchange policy to maintain price stability and balance-of-payments stability.
2. Maintain stability of the banking and financial sector, widen access to financial services and build public confidence.
3. Develop a secure, healthy and efficient payment system.

Without prejudice to these, NRB supports the economic policies of the Government of Nepal.

Functions (Section 5)

• Issue banknotes and coins; under Section 52 NRB has a monopoly over note and coin issue.
• Formulate and implement monetary policy and foreign exchange policy; determine the exchange rate system; manage the foreign exchange reserve.
• License, regulate, inspect and supervise banks and financial institutions.
• Act as banker, adviser and financial agent of the Government.
• Act as banker to banks and lender of the last resort.
• Establish, promote and regulate payment, clearing and settlement systems.
• Conduct open market operations for liquidity management.

Governance

• Board (Section 14): Governor as chairperson, the Secretary of the Ministry of Finance, two Deputy Governors and three directors appointed by the Government, a total of seven members.
• Tenure (Section 18): five years for the Governor, Deputy Governors and directors; a retiring Governor may be reappointed for one more term.
• The Governor is appointed by the Council of Ministers on the recommendation of a committee chaired by the Finance Minister (Section 15).

Instruments of monetary policy

Interest rate corridor. The bank rate is the ceiling, the SDF rate is the floor and the policy rate lies between them. The operating target is the weighted average interbank rate, which NRB tries to keep close to the policy rate. Current levels of these rates change with each policy and review, so always check the latest NRB document.

Open market operations. A repo or outright purchase injects liquidity. A reverse repo, outright sale or deposit collection absorbs liquidity.

Provisions worth memorising

• Section 44: NRB has full power to formulate and implement monetary policy.
• Section 47: the fine for failing to keep the compulsory reserve may not exceed three times the maximum bank rate.
• Section 49: loans and refinance to BFIs for a maximum of one year; in extraordinary circumstances NRB lends as lender of the last resort.
• Section 75: credit to the Government must be repaid within 180 days.
• Section 94: NRB publishes a report on monetary policy each year. Annual monetary policy statements began in fiscal year 2059/60.

Worked example

With a simple deposit multiplier of 1/CRR, an initial deposit of Rs 100 crore supports at most 100/0.05 = Rs 2,000 crore of deposits at a 5 percent CRR, and 100/0.04 = Rs 2,500 crore at 4 percent. Cutting the ratio adds Rs 500 crore of potential deposits.

Exam pointers

• Three objectives: price and external stability, financial stability with access, payment system.
• Board has seven members; tenure is five years.
• Higher CRR, SLR, bank rate or policy rate tightens; lower values ease.
• Repo injects, reverse repo absorbs.
• Corridor: bank rate on top, SDF rate at the bottom, policy rate in between.
• Sections 47 (three times bank rate), 49 (one year), 75 (180 days), 94 (yearly report).