Steering Nepal's Economy: NRB's Bold Moves and Market Impacts

Think of monetary policy as the steering wheel of a country's economy, and Nepal Rastra Bank (NRB) is in the helm. Monetary policy encompasses the strategies used by a central bank to control the supply of money and interest rates. Whether NRB is hitting the gas by lowering rates to stimulate borrowing and spending or tapping the brakes to control inflation, its recent adjustments are all about guiding the economic road ahead. Let’s dive into some of their latest maneuvers and how they're impacting the market.

Ever wondered why banks can't just spend all your money? Enter CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio), the banking world's safety nets. CRR ensures banks keep a slice of your deposits as cash with the central bank, keeping things secure. Meanwhile, SLR makes sure banks hold onto a chunk of their deposits in easily accessible assets, ready for any unexpected needs. The Nepal Rastra Bank (NRB) adjusts these ratios like a master conductor, fine-tuning the economy to keep everything running smoothly.

NRB's Recent Adjustments and Counter-Cyclical Buffer

NRB recently made some interesting tweaks. They kept the ratios for bank reserves steady but cut the policy rate from 7% to 6.50%. Initially, the bank rate held at 7.5%, and the deposit collection rate dropped from 5.5% to 4.5%. Later, they went even further: lowering the bank rate to 7%, the policy rate to 6%, and the deposit collection rate to 3%. This is like giving banks a discount on money, encouraging them to lend more and get the economy moving.

So, what NRB could also do was to reduce the CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio), but they did not change these rates. Why? Because banks still have excess liquidity and funds to lend, but the demand is not there, so rates are dropped to stimulate borrowing. Additionally, NRB now feels the best way to inject money into the economy is through the private sector, as emphasized in the Governor's speech. Despite these cuts, credit growth hasn’t sped up as much as hoped, mostly affected as the country economy is currently recovering from the pandemic. NRB's goal here is clear: make borrowing cheaper, get more loans out there, and boost the economy.

NRB also cut the risk weight for hire purchase loans from 125% to 100%. This should make it easier for people to get loans for buying vehicles, giving the auto industry a nice little boost. Additionally, housing loans now cover 70% of an employed person’s salary, up from the previous 50%, making home ownership more accessible.

In a move to strengthen the banking sector against economic fluctuations, NRB has enforced a 0.50% Counter-Cyclical Buffer. Commercial banks must maintain this buffer by the end of the fiscal year, fortifying their resilience. While this ensures stability, it might constrain banks' operational capacities as they allocate capital to build this buffer, potentially limiting resources available for lending and investment.

Impacts on the Stock Market and Real Estate

Remember when NRB capped margin loans, causing them to drop from Rs. 108.5 billion to Rs. 76.3 billion? That was a rough patch for the market. But with recent changes, like raising the cap and reducing the risk for larger share loans, NRB is aiming to inject some optimism. If they lift the cap even more, it could get the market buzzing again with more trading activity and investor participation.

The ceiling on home loans has been raised from Rs. 15 million to Rs. 20 million. While this isn't a game-changer, it could give the real estate sector a little push. More people might take out loans to buy homes, which could stimulate the real estate market.

Outlook

Investors should keep a close eye on monetary policy as it’s a treasure map for new investment opportunities. NRB’s current signals suggest more money flowing into the private productive sector without twitching the interest corridor, which could be a goldmine for savvy investors.

Treasury bills (T-bills) are a risk-free investment for banks, making them highly attractive. However, the risk of high interest rates bid by commercial banks on T-bills needs careful management. During the year (2079/80), the average interest rate on T-bills reached 12%. If this risk-free rate is high, the interest rates banks charge borrowers would also increase. To address this, the Nepal Rastra Bank (NRB) intervened by capping the T-bill interest rate growth to 6% by the year's end. The NRB achieved this by allocating the majority of T-bills to itself and only a small portion to banks and financial institutions (BFIs), which effectively brought down the average interest rate on T-bills. This strategic move by the NRB ensured stability in the financial market while controlling the potential risk of high interest rates.

NRB's recent policy changes are all about finding the sweet spot between boosting economic activity and keeping things stable. Lower interest rates and adjusted lending caps are designed to encourage more lending and investment, which is good news for the stock market and real estate sector. NRB's efforts to foster the private sector with lower-interest loans are promising, though they need to watch out for the risk of inflation.

NRB doesn't directly control the interest rates; instead, it changes the policy rate, making the cost of funds cheaper for banks. This leads to lower credit rates. Additionally, NRB can fluctuate the interest corridor for cash reserves and SLR.

In conclusion, NRB's strategy is to ease the economic environment, creating conditions that naturally inject cash into the economy.

About the Author: 

- Aditya Acharya, ACCA Student

- Research Analyst

- Garima Capital Limited