Background

According to Edward Shapiro, “Monetary Policy is the exercise of the central banks control over the money supply as an instrument for achieving the objectives of economic policy.” Here, Monetary refers to anything that has to do with money, while policy is the umbrella term for laws and rules. Monetary policy is the policy adopted by a nation's central bank to control the overall quantity of money in circulation, promote economic growth, and put into action policies like raising interest rates and changing bank reserve requirements. Monetary Policy can be categorized into contractionary and expansionary monetary policy; expansionary policy is intended to increase the money supply in an economy whereas contractionary policy is intended to decrease it. Full employment, Economic growth, Price stability, Exchange rate stability, Balance of payment stability, Neutrality of money are the goals/objectives of Monetary Policy.

Moreover, the central bank of Nepal likewise sets monetary policy. Every year, the Nepal Rastra Bank (NRB) releases monetary policy. With the founding of Nepal Rastra Bank in 1956, central banking in Nepal was established, but it wasn't until the middle of the 1960s that monetary policy was actually implemented through the employment of policy instruments. Similarly, after the implementation of the structural adjustment program in the middle of the 1980s, major changes were made to the evolution of the monetary policy in Nepal. The NRB steadily switched from using direct instruments of monetary policy to using indirect market-based instruments. The Nepalese monetary policy framework has largely remained unchanged since the explicit introduction of the policy in 2002, notwithstanding some adjustments to the policy documents. For instance, between 2003 and 2005, the operating objective for NDA was defined. The goal of monetary policy in 2009/10 included the inclusion of financial stability. Additionally, the monetary policy for 2013/14 was intended to keep inflation within a predetermined range, maintain stability in the external and financial sectors, make use of credit in the productive sector, and increase financial inclusion. Since 2016/17, the growth of financial access is positive even though inflation is still at a low level. The external sector is, nevertheless, under pressure. Input from stakeholders, and consideration of the national and global economic outlook were all taken into account when formulating the monetary policy for 2018/19. The Fifteenth Plan of the GoN was also taken into consideration when developing the strategy for 2020/21, therefore developed at a period when the entire globe was experiencing economic and humanitarian issues related to the COVID–19.

This study attempts to analyse the monetary policy of Nepal, specifically to analyse the economic situation of Nepal, to examine the money supply and the inflation in Nepal, to identify the problems and prospects of monetary policy in Nepal, to study about different macroeconomic indicators and to pinpoint Nepal's monetary policy's issues and future potential.

Meanwhile, the study has adopted descriptive analysis of secondary data, as well as a qualitative technique to investigate the problems. Therefore, it is based on data published by various government organization like NRB, Nepal Economic Forum, and NBSM. From the documents, facts, information, and policies were taken out, calculated, and presented in a logical sequence.

Monetary Policy FY 2022/23

The monetary policy for the fiscal year 2022/2023 was announced by Governor of Nepal Rastra Bank CA Maha Prasad Adhikari on July 22, 2022 while taking into consideration the macroeconomic environment at the time. The preceding two monetary policies were expansionary in nature but because of the monetary policy's laxity and the rising cost of petroleum products, inflation increased from 4.4% at the start of the FY (mid-August 2021) to 8.6% by the close of the preceding FY (mid-June, 2022). This fiscal year, the NRB has tightened monetary policy in response to the slowing economy and the rising inflation rate.

Monetary Policy Stance

When there is a high credit-to-GDP ratio, the goal of monetary policy will be to move credit to the productive sector rather than encourage credit expansion. There will be a progressive reduction in the lax regulatory measures implemented during the COVID-19 infection, and they will be implemented in compliance with responsible regulatory norms. The refinance will be re-evaluated so that only the productive industries—such as agriculture, exports, and the severely impacted regions that haven't yet recovered from the COVID pandemic—would be eligible for it. Similarly, there will be gradual minimization over-centralization of credit and expand availability to credit for domestic small and medium-sized businesses. By expanding financial literacy, financial access, and financial inclusion, digitizing payments and financial transactions will broaden the scope of monetary policy.

Structure and Target of Monetary Policy

The monetary policy has been restrained by the fixed exchange rate with the Indian Rupee and the current strategic structure of the monetary policy. Loans to the private sector are anticipated to expand at a rate of 12.6%, while the broad money supply is predicted to grow at a rate of 12%. The goal is to maintain inflation at 7% while achieving 8% economic growth. Over the import and export of goods and services for the next seven months, forex will be kept. The rates within the interest rate corridor have been raised by 1.5% points to promote macroeconomic stability while keeping the bank rate at 8.5%, the policy rate at 7.0%, and the deposit collection rate at 5.5%. When banks and other financial institutions borrow money from the Central Bank, their interest rate will be higher. An arrangement will be formed to open a repo or reverse repo if the weighted average interest rate of interbank transactions is more than 2% points lower than the policy rate. Additionally, preparations will be made to open deposits if the weighted average interest rate of interbank transactions declines by more than 3% points in comparison to the policy rate. It will be possible to continue using other open market technologies. By the end of 2079 Poush, commercial banks and financial institutions must maintain a SLR of 12%, while development banks and financial institutions must maintain an SLR of 10%. Likewise, CRR has been increased from 3% to 4%.

Financial sector reform and regulatory regime

The Counter Cyclic Capital Buffer, which was suspended due to the Covid-19 epidemic, will be implemented from Shrawan 2080. Commercial banks and microfinance institutions who merge within their own categories or are acquired by the Poush end 2079 while performing joint operations will receive rebates and facilities connected to merger and acquisitions from NRB. When granting credit up to Rs. 20 million to the productive sectors, banks and financial institutions are permitted to set the interest rate by adding a maximum of 2% points of premium to the base rate. When necessary, coordination with the appropriate agencies would be used to strengthen the international coordination framework regarding the prevention of financial investment in money laundering and terrorist operations. To promote green financing, a draft of green taxonomy will be created, which will include reporting climate risk, issuing green bonds, recognizing capital needs, etc. Migrant employees who want foreign money must have a bank account with a balance in Nepali rupees, per NRB regulations. The NRB's refinancing program and any concessional loans provided to COVID-19-affected industries will be gradually paid back. Celebrating the year that electronic payment transactions were promoted. To gauge the actual state of financial access in the context of expanding the reach of the financial sector in Nepal, a financial inclusion index will be developed.

Findings

Hence, we can find that inflation is to be restricted to7% in accordance to the Central Bank as suggested by the government annual budget plan. Also, the central bank has increased the CRR for banks and financial institutions from three to four per cent. Likewise, the SLR for commercial banks, development banks and finance companies has gone up to 12, 10 and 10 per cents respectively from the existing 10, 8 and 7 per cents. NRB has lowered its credit expansion from 19% to 12% further arguing it resulted in the swallowed imports. Similarly, the monetary policy last year introduced an additional limit of Rs.40 million on the margin-nature loans against the collateral of shares. However, the new policy has removed this and kept it at Rs.120 million from the entire financial system instead. If any banks or financial institutions are merging, their share transactions will not be suspended. If we want to exchange foreign currencies, from now onwards, we need to have a bank account. Refinancing for COVID-hit businesses will continue, but the amount will reduce.

Conclusion

Lastly, Monetary Policy FY 2079/80 is a document that everyone had their sights set on, believing it would offer the country's many problems—such as the ongoing liquidity issue and the stability of the external sector—magical remedies. The policy, which attempts to contain inflation by limiting the money supply, has been dubbed "contractionary" by economists. Different economic sectors will be significantly impacted by the policy. Therefore, by increasing interest rates, the monetary policy has adopted a cautious tightening strategy to support macroeconomic stability while preserving price and external sector stability. Given that the targets for loan expansion have been reduced in order to account for the rising trade deficit and inflation, the liquidity situation is predicted to remain tight. The policy chosen will be able to keep inflation within the budget's target, although obtaining an 8% economic growth rate in the upcoming fiscal year may prove difficult. To increase the capacity of the economy's productive sector and decrease the country's reliance on imports, a special emphasis has been placed on doing so. In the long run, encouraging the growth of the productive sector will help to create jobs and produce sustainable economic growth. As a result, the monetary policy has taken into account the trade-off between economic growth and stability and has placed a higher priority on economic stability, paying particular attention to the productive sector in order to increase the economy's capacity for production and achieve sustainable economic growth.

REFERENCES

Budha. B. B. (2015) Monetary policy transmission in Nepal.

No. 29/2015. Nepal Rastra Bank, Research Department.

Gupta. A. (2022). Key Highlights of Monetary Policy FY 2022/23.

Nepalese Economic Forum. https:// nepaleconomicforum.org/key-highlights-of-monetary-policy- fy-2022-23/

Nepal Rastra Bank. (2022). Monetary Policy for 2022/23.

https://www.nrb.org.np/ofg/monetary-policy-in-english-2022-23-full-text/

Online Khabar. (2022). Monetary Policy 2022/23: Here are 7 Highlights. Retrieved December 21, 2022, from https://english.onlinekhabar.com/monetary-policy-2022-23-highlights.html

Ms Phuyal is a KIST BBA student.