Monetary Policy F/Y 2082/83

Question: What is Monetary Policy? Prepare a list of monetary policy instruments. Mention the main features of the Monetary Policy 2082/83 recently issued by Nepal Rastra Bank. (2+4+4)

Monetary Policy

Monetary policy is the policy determined by the monetary authority to control the supply of money and credit in the country. It is a macroeconomic policy adopted in relation to money supply, liquidity, exchange rate, credit flow, interest rate, and price levels as per national needs.

• Until the 1930s, monetary policy was limited only to currency policy.
• After the establishment of the IMF in 1946, it was considered as a mechanism to control inflation and accelerate economic growth.
• In Nepal, since FY 2059/60, NRB has been publishing monetary policy every year in line with the budget.

NRB published the monetary policy for the current fiscal year 2082/83 on Ashadh 27.

Instruments of Monetary Policy

a) Indirect/Quantitative Instruments

• Bank Rate: The interest rate charged by the central bank when lending to other banks and financial institutions.
• Cash Reserve Ratio (CRR): The mandatory portion of commercial banks’ deposit liabilities that must be kept with the central bank.
• Open Market Operations: Buying and selling government treasury bills in the money market. Nepal Rastra Bank has been issuing treasury bills since 2050. Treasury bills are of four types: outright purchase, Repo, outright sale, and Reverse Repo.

b) Direct/Qualitative Instruments

• Credit Ceiling: The central bank determines the lending limit of commercial banks.
• Sectoral Credit Allocation: Specific directives are imposed when lending to priority sectors or purposes.
• Moral Suasion: The central bank “advises” or “encourages” banks to adopt monetary discipline.
• Directives: Binding instructions given by the central bank to commercial banks.
• Fixing Interest Rates.

Main Features of the Monetary Policy for Current Fiscal Year

1. Changes in Interest Rates

• Upper limit of the interest rate corridor: reduced from 6.5% to 6%.
• Lower limit of the interest rate corridor (Standing Deposit Facility-SDF): reduced from 3% to 2.75%.
• Policy rate: reduced from 5% to 4.5%.

2. Credit and Money Supply

• Broad money supply (M2) target: maintained at 13%.
• Private sector credit growth target: 12%.

3. Inflation and Economic Growth Targets

• Inflation control target: 5%.
• Economic growth target: 6%.

4. Housing Loans (Home Loan)

• Loan limit for purchasing or constructing the first home: up to Rs. 30 million.
• Loan-to-Value (LTV) ratio: 80% for the first home and 70% for other homes.

5. Share Margin Loan

• Maximum loan against share collateral increased from Rs. 150 million to Rs. 250 million.

6. Foreign Exchange Management

• Foreign currency limit for personal foreign travel increased from USD 2,500 to USD 3,000.

7. Targeted Loans for Agriculture, Women, Youth, and Small Enterprises

• Targeted loan schemes implemented for women entrepreneurs, farmers, and small businesses.

8. Promotion of Digital Payment Systems

• Policy to expand access to digital banking and attempt to exit the FATF Grey List.

9. Reforms in Cooperatives and Microfinance

• Arrangements introduced for merger, restructuring, and grievance handling in cooperatives and microfinance institutions.

Conclusion

The policy operated to increase or decrease money supply is called monetary policy. In Nepal, the central bank formulates and implements monetary policy according to the trend of the economy. It is necessary to adopt monetary policy instruments in line with the nature and trend of the economy.