Chapter 6 · Week 6 — Interest Rates and Monetary Operations
Interest Rates and Monetary Operations
Why Nepali rates collapsed after 2022/23, the deposit-rate inversion squeezing bank margins, and what sterilisation costs.
Last week ended with a banking system holding more deposits than it can lend. This week is what that does to the price of money — and it turns out to explain almost everything about Nepali asset markets in 2025/26.
6.1 The rate ladder
Interest rates in Nepal form a ladder, and every rung is published in this release.
┌─────────────────────────────────────────────────────────────┐ │ │ │ POLICY CORRIDOR [R] │ │ upper bound ── standing liquidity facility │ │ policy rate ── repo rate │ │ lower bound ── deposit collection rate │ │ │ │ │ ▼ NRB steers the market inside this band │ │ │ │ INTERBANK RATE 2.99 % ← banks lend each other │ │ │ │ │ ▼ │ │ 91-DAY TREASURY BILL 2.94 % ← risk-free, short │ │ 364-DAY TREASURY BILL 2.99 % │ │ │ │ │ ▼ │ │ DEPOSIT RATE 4.29 % ← what savers get │ │ │ │ │ ▼ │ │ BASE RATE 6.09 % ← banks' cost floor │ │ │ │ │ ▼ │ │ LENDING RATE 7.99 % ← what borrowers pay │ │ │ │ All weighted averages of mid-May to mid-June. │ └─────────────────────────────────────────────────────────────┘
Read the ladder from the bottom and two gaps stand out:
THE TWO SPREADS
Lending 7.99 − Deposit 4.29 = 3.70 pp
the banking system's gross margin
Base 6.09 − Deposit 4.29 = 1.80 pp
the cost of running a bank plus statutory
requirements, before any borrower risk
Lending 7.99 − Base 6.09 = 1.90 pp
the average risk premium charged over the floor6.2 The collapse in rates, and what caused it
Look at what has happened over four years.
INTEREST RATES, ANNUAL (percent)
2021/22 2022/23 2023/24 2024/25 2025/26
──────────────────────────────────────────────────────────────
91-day T-bill 10.66 6.35 3.00 2.95 2.94
Interbank 6.99 2.98 2.99 2.92 2.99
Deposit rate 7.41 7.86 5.77 4.19 4.29
Lending rate 11.62 12.30 9.93 7.85 7.99
Base rate 9.54 10.03 8.00 6.02 6.09
──────────────────────────────────────────────────────────────
91-day T-bill: 10.66% ██████████████████████
6.35% █████████████
3.00% ██████
2.95% ██████
2.94% ██████
The short rate fell by roughly THREE QUARTERS in two years
and has sat near 3% ever since.Why? Go back to Week 4 and Week 5.
THE CAUSAL CHAIN, 2021/22 → 2025/26
2021/22 BoP DEFICIT Rs −252 bn, reserves fell to $9.5 bn
│
▼
liquidity scarce → banks bid for deposits
→ T-bill 10.66%, lending 11.62%
│
▼
2022/23 import restrictions + high rates cut imports
remittances kept growing
│
▼
2023/24 BoP SURPLUS Rs +502 bn
2024/25 BoP SURPLUS Rs +595 bn
2025/26 BoP SURPLUS Rs +491 bn
│
▼
NRB buys the foreign currency, issues rupees
→ reserve money ▲ → deposits ▲ 12%
│
▼
but credit demand only ▲ 8%
│
▼
EXCESS LIQUIDITY
│
▼
T-bill 2.94%, interbank 2.99%6.3 The inversion nobody mentions
Look carefully at the ladder:
Interbank rate 2.99 % 91-day T-bill 2.94 % Deposit rate 4.29 % ◄── HIGHER than both Banks are paying depositors 4.29% while lending to each other at 2.99% and to the government at 2.94%. ┌───────────────────────────────────────────────────────┐ │ A bank taking a new deposit at 4.29% and parking │ │ it in a 91-day T-bill at 2.94% LOSES 1.35 points. │ │ │ │ Deposit rates are sticky — contractual, competitive │ │ and slow to reprice. Market rates moved first. │ │ │ │ This is a squeeze on bank margins that shows up in │ │ the NRB Key Ratios sheet as spread compression, and │ │ it is a genuine headwind for bank earnings even in │ │ a year when everything else looks benign. │ └───────────────────────────────────────────────────────┘
That inversion is the single most useful thing an investor can take from this week, and it is visible only if you read the rates as a ladder rather than one at a time.
6.4 Real interest rates
A nominal rate tells you nothing until you subtract inflation.
┌──────────────────────────────────────────────────────┐ │ │ │ REAL RATE ≈ nominal rate − inflation │ │ │ │ precisely (Fisher): │ │ (1 + real) = (1 + nominal) ÷ (1 + inflation) │ │ │ └──────────────────────────────────────────────────────┘
Worked example, 2025/26.
CPI y-o-y = 2.72 %
instrument nominal real (approx) real (Fisher)
──────────────────────────────────────────────────────────
91-day T-bill 2.94 +0.22 pp +0.21 %
Interbank 2.99 +0.27 pp +0.26 %
Deposit rate 4.29 +1.57 pp +1.53 %
Base rate 6.09 +3.37 pp +3.28 %
Lending rate 7.99 +5.27 pp +5.13 %
Fisher for the deposit rate:
(1.0429 / 1.0272) − 1 = 0.01528 = 1.53 %Now compare with the squeeze year:
REAL DEPOSIT RATE, THEN AND NOW
2021/22: nominal 7.41 % − inflation 8.08 % = −0.67 %
savers LOST purchasing power
2025/26: nominal 4.29 % − inflation 2.72 % = +1.53 %
savers GAIN, modestly
The nominal rate is much lower and savers are better off.
Anyone comparing deposit rates across years without
adjusting for inflation has the sign wrong.6.5 Monetary operations — how NRB actually steers
NRB does not announce a rate and hope. It transacts daily.
THE TOOLKIT [R]
┌─────────────────────┬───────────────────────────────────┐
│ ABSORBING │ INJECTING │
│ (too much liquidity)│ (too little) │
├─────────────────────┼───────────────────────────────────┤
│ Deposit collection │ Repo │
│ Reverse repo │ Standing liquidity facility │
│ NRB bond issue │ Outright purchase │
│ Selling FC │ Buying foreign currency │
└─────────────────────┴───────────────────────────────────┘
In a BoP-surplus year, NRB is doing two contradictory
things at once:
BUYING foreign currency → injects rupees
ABSORBING via deposit
collection / bonds → withdraws rupees
This is STERILISATION: taking back with one hand the
liquidity the exchange-rate commitment forces it to
create with the other.
FC purchase ████████████████ rupees created
Absorption ██████████ rupees withdrawn
──────────────
Net ██████ still expansionary
→ rates stay lowSterilisation is never complete, because absorbing costs NRB money — it pays interest on what it absorbs while earning little on the reserves it holds. That cost is the practical limit on how hard a small central bank can lean against a remittance inflow.
6.6 What low rates do to an economy that cannot use them
Textbook: low rates → cheap borrowing → investment → growth. Nepal in 2025/26 shows what happens when that chain breaks at the second link.
THE TRANSMISSION THAT DIDN'T
rates fall ────► borrowing costs fall
│
▼
credit grows only 8.19 %
(deposits grew 11.96 %)
│
┌───────────────┴───────────────┐
▼ ▼
NOT into new factories INTO EXISTING ASSETS
(capital formation 31.9% land, and shares
of GDP, and much of it
is construction) │
▼
NEPSE 2,112 → 2,655 → 2,724
market cap/GDP 58% → 71% → 70.5%
When money is abundant and productive investment
opportunities are scarce, the money does not vanish.
It bids up the price of assets that already exist.That is the mechanism behind Week 8, and it is why an equity investor in Nepal must read the liquidity data before reading a single company's accounts.
Formulas from this week
Real rate (approx) = nominal rate − inflation
Real rate (Fisher) = (1 + nominal) ÷ (1 + inflation) − 1
Banking spread = lending rate − deposit rate
Cost of funds gap = base rate − deposit rate
Risk premium = lending rate − base rate
Liquidity signal = deposit growth − credit growth
positive and widening
=> excess liquidity, falling rates
Sterilisation = FC purchase (injection)
− absorption operationsWhat you should be able to do now
- Lay out the rate ladder from policy corridor to lending rate.
- Explain why Nepali rates collapsed after 2022/23 in terms of the balance of payments rather than a policy decision.
- Spot the deposit-rate-above-market-rate inversion and say what it does to bank margins.
- Compute real interest rates both ways and compare across years correctly.
- Explain sterilisation, why NRB does it, and why it is never complete.
- Explain why falling rates lifted asset prices rather than investment.
Next week: the government — revenue, expenditure, deficit and debt, and the capital budget that never gets spent.
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