Monetary Policy Transmission to Stock Market: 2077 could turn out to be NEPSE’s Year

Dipendra Karki | July 18, 2020

Nepal Rastra Bank announced the most awaited monetary policy for FY 2077/78 on 2077-04-2 (Friday). Investors in the market were looking forward to NRB’s Monetary Policy after the disappointing Government budget. The policy is welcomed by most of the sectors in Nepalese economy as it has positive stimulus in the wake of the pandemic. This is the first time after couple of years, the policy has given many positive triggers in the stock market. As most of the demands of investors in the market are addressed by the monetary policy, I expect the stock market will response it accordingly and shall witness the new highs in this year 2077 if no other disruptions happen in the economy.  Let’s see, how the monetary policy impacts on stock market and equity pricing in different sectors with probable pros and cons.


The limit of share pledge loan has been increased to 70 percent, based on the average price of 120 days. Earlier, the limit for such loans was 65 percent. The valuation of shares was based on the average price of the last 180 days or the prevailing market price of the stock.

This provision will release extra cash from financing to investors in the market. As the recent price is up-trending, 120 days average will definitely be higher than 180 days. Allowing extra margin of 5 percent could release extra fund further.

2. CCD Ratio

The CCD ratio has been increased by five percent, now reached to 85%, to increase liquidity. Banking sector is witnessing excess liquidity in recent days. CCD provision also adds more liquidity in the market. That helps reduce interest rates.

The excess liquidity, a cut in the repo, short-term lending rate for commercial banks, or postponement of countercyclical buffer would bring cheers to the market as it would eventually result in lower interest rates.


Monetary policy has banned the distribution of cash dividends to banks and financial institutions with a net distributable profit of less than 5 percent of the total paid-up capital. All licensed BFIs have been allowed to declare and distribute cash dividend only up to 30 percent of the net distributable profit of the Fiscal Year 2076/77 (not exceeding the weighted average interest rate of the deposit maintained in Ashad end 2077).

The past evidences shows that Nepalese investors are mostly attracted to bonus share rather than the cash. The distribution of bonus shares has been encouraged by discouraging the distribution of cash dividends in BFIs. It is not possible to give more than 30 percent cash dividend from the total distribution and should ensure it be less than the cost of fund. For example, If Nabil bank’s weighted cost of deposit is 6% and has total dividend capacity of 30%. Then, Bank can provide the cash dividend maximum to 9% (0.3 of 30%). However, as the bank’ cost of deposit is 6%, it is only allowed to provide cash dividend maximum to 6% only. The rest 24% will be the bonus share. It will trigger positively on stock pricing.


Commercial banks should invest at least 10 percent of the total loan in the energy sector in five years from now. Similarly, the monetary policy stipulates BFIs to provide loan by adding only 1 percentage point to the base rate for five years after the start of export of electricity by constructing a power project. Further to encourage investment in reservoir-based hydropower projects, the policy has stated that such projects will be able to get loan by adding only 1 percentage point to the base rate. NRB allowed that it will not need the approval of the central bank to partially capitalize the interest amount until the transmission line is constructed and operational.

These provisions in hydropower sector have leveraged the access to banks and cut down the cost of financing. Moreover, Hydropower is the least affected sector by Covid-19. This will have positive stimulus on pricing of hydro-stocks. The only problem observed is the good governance.


The balance sheet of BFIs won’t be much affected due to this pandemic. Central Bank, through monetary policy provided many reliefs to this end. The loans in good standing at the end of poush-2076 shall remain good as BFIs will be able to restructure and reschedule it once and for all by recovering a minimum of 10 percent interest.

The provision of interest capitalization, loan rescheduling or restructuring shall make the financials looks lucrative though it possesses credit risk in the long-run. For the time being, the stock prices on banking sector seems to move up with the expectation of better prospect in recent.


The interest rate charged by microfinance to its customers has been fixed at a maximum of 15 percent. Microfinance institutions have been charging up to 18 percent interest from their customers, which has been declining since the current fiscal year. Similarly, as stated by monetary policy base rate calculation method will be prepared for microfinance and more arrangements will be made for determining interest rate. Monetary policy also restricts the MFIs not to keep and renew the term deposits in banks and financial institutions for a period of more than 3 months except for long term funds established for certain purposes.  Now onwards, MFIs can open branches to only places of wards that do not have branches of MFIs.  NRB asked to publish the financial statements of the Fiscal Year 2077/78 in accordance with the Nepal Financial Reporting Standards (NFRS) by the approved microfinances for disbursing bulk loans and collecting deposits from the public.

It’s hard to run microfinance institutions with their lending rate of 15 percent. The above provisions shall lead to squeeze the operating income of the MFIs that may shed negative impacts on stock prices.

Talking to the pros, the licensing for new MFIs has been postponed. Also, the licensing process of microfinance institutions in the pipeline has been canceled. The collateral based loan limit has been increased from Rs 700,000 to Rs 1.5 million.

It increases and extends the business avenues and capacity of MFIs. The charge for MFI as being unscrupulous lenders in the past will be trimmed. It is a good idea to prioritize the capital increment plan of microfinance institutions and make the institutions stronger and stronger.

7. Big-Merger

Monetary policy encourages big mergers in banking sector offering many concessions in operational issues. In case of joint transaction as per the policy till Ashad end 2078, 0.5 percent discount will be given in the mandatory cash reserve ratio and 1 percentage point in the statutory liquidity ratio from the time of joint transaction till Ashad end 2079.  Institutional time deposit collection limit will be increased by 10 percentage points. 5 percent more points will be added to the deposit collection limit from single depositor prescribed by NRB. Merger of BFIs promoted and indirectly owned by the same person and with established business relations shall be prioritized.

Those provisions lead the sector towards big merger that ultimately enhance the capacity and quality of the Banks. Prospects of stronger BFIs in future shall provide positive impacts on stock pricing.

8. Economic Perspective

The NRB monetary policy response to this severe, yet temporary, shock should have two key elements, and these are exactly what was unleashed by the NRB.

First, safeguarding liquidity conditions in the banking system through a series of favourably-priced traditionally liquidity measures, including aggressive policy rate and cash reserve ratio cuts.

Second, protecting the continued flow of credit to the real economy through a fundamental recalibration of the targeted longer-term refinancing operations and a universal forbearance programme for stressed sectors to bank credit flows to such sectors after the crisis is over.


After the global financial crisis, central banks like the U.S. Federal Reserve and the European Central Bank have been constantly interacting with the financial markets and have taken a plethora of unconventional measures to stabilise the market architecture. Nepal Rastra Bank, under the current dispensation, can now be equally counted in such an august league.

Monetary policy- 2077/78, in the midst of the current Corona crisis has positively addressed the growth, expansion and sustainability of the capital market. It has made stock market investors excited and provided many positive triggers to the stock market. Stemming upon those facts and reviews & assumptions of nothing unusual disruptions happens in the economy, I expect that the stock market will attain the new highs in this year 2077 soon.

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