As the year 2025 comes to an end, the Nepal Stock Exchange (NEPSE) index floats resiliently above 2,600, and market capitalisation expands into trillions of rupees. This appears similar to financial modernisation, a shift from a niche club of elite investors to a mass movement fuelled by digital access. The over 6.3 million online trading accounts in use today mark a significant surge from 740,000 accounts in early 2020.

However, this democratisation is a veneer masking a structural fragility. We are not witnessing healthy capital formation but a classic rational bubble fuelled by an unprecedented glut of liquidity. Beneath the digital hum of the trading management system lies a market plagued by information asymmetry, regulatory capture and a real sector flashing red warning signs. The current market trend is not an engine of economic growth; it is a wealth transfer mechanism from the hopeful middle class to a kleptocratic network, sustained by a temporary flood of cash that masks the underlying rot.

The micro disconnect

In a functional economy, stock market performance correlates with corporate earnings and economic productivity. In Nepal, it has decoupled entirely. Contrary to fears of a credit crunch, the current market is defined by a massive, sustained excess of liquidity, a condition likely to persist for at least the next three years. With limited avenues for industrial investment and a stagnant real estate market, this lazy capital has nowhere to go but the secondary market.

While the stock market capitalisation has surged, the banking sector, known as the primary engine of our economy, is haemorrhaging. Data from the first quarter of the current fiscal year reveals a systemic rot. Commercial bank Non-Performing Loans (NPLs) have surged to 4.86 percent. In a rational market, when the primary lenders face rising defaults and stagnant credit growth, bank valuations should correct. Instead, they are being buoyed by the very liquidity they cannot lend out to the productive sector.

This disconnect signals a potential Minsky Moment, a sudden collapse in asset prices precipitated not by a lack of cash, but by a systemic re-rating of risk. When the music stops, and the realisation hits that the quality of these assets cannot support their valuations, the abundance of cash will not save the market; it will only have served to make the bubble larger and the eventual burst more catastrophic.

Irrational exuberance

To understand the current market, we should revisit the Covid-19 era. During the lockdowns, when the real economy was paralysed and businesses were shuttered, NEPSE performed a bizarre feat: It reached a record high of over 3,200 points. This phenomenon is a textbook example of speculative manias during economic shocks. With leisure time in abundance and physical businesses closed, many Nepalis turned to digital trading as a pastime. Excess liquidity, caused by low demand for industrial loans and record remittance inflows, flowed directly into the stock market during the pandemic.

Most retail investors today entered during this gold rush, driven by herding behaviour. They are now clinging to the hope that the market will return to those heights, ignoring that those gains were detached from reality. This is what behavioural economists call anchoring bias, where investors fixate on a past peak as the true value of the market.

Market for lemons

Nobel laureate George Akerlof’s theory of the ‘Market for Lemons’ argues that when sellers possess more information than buyers, bad assets drive out good ones. The Initial Public Offering has mutated from a tool for capital formation into an exit strategy for promoters. The recent trend of premium share issuances, exemplified by peripheral controversies, set a dangerous precedent. Valuation models were manipulated to justify exorbitant entry prices for the public, often based on projected earnings that bear little resemblance to reality.

The hydropower sector is the epicentre of this asymmetry. Promoters are fully aware of the 30-year trap where project licenses expire and ownership transfers to the government, yet they sell equity to the public as if it were a perpetuity. Retail investors are effectively providing exit liquidity for institutional lemons. Without a strong regulator to verify the quality of these assets, the market is being flooded with junk, sold at a premium to an uninformed public.

Failing immune system

If information asymmetry is the disease, the regulator, the Securities Board of Nepal, is the failing immune system. The board has ceased to function as an impartial arbiter, exhibiting clear signs of regulatory capture.

The credibility of the regulator has hit rock bottom. When a regulator becomes a bottleneck for extraction rather than a facilitator of compliance, the cost is ultimately passed down to the shareholder. The board’s failure to implement the Capital Market Reform Action Plan, including the classification of risky firms, suggests a fundamental absence of political will to protect the common investor.

This institutional fragility is compounded by coordination failures with market actors. Instead of acting as a coherent ecosystem, Nepal’s capital market governance resembles a collection of silos, each deflecting responsibility, none delivering systemic confidence.

Distributional crisis

Driven by fear of missing out and a lack of alternative investment opportunities in a stagnant real economy, retail investors are entering the market at peak valuations. The presence of excess liquidity creates a false sense of security. It allows the bubble to inflate further, luring in more middle-class savings. However, when the eventual correction occurs, triggered perhaps by a regulatory crackdown, a systemic re-rating of risk, or the natural deflation of this speculative fever, the resulting evaporation of household savings will be catastrophic. This wealth destruction event will not only devastate individual portfolios but will also depress consumer sentiment and paralyse the national savings pool for years to come.

Nepal’s capital market stands at a historical fork. The enthusiasm of 6.2 million investors is a precious economic resource and a potential engine for funding the nation’s needs. However, as recent market analysis suggests, trust is a finite currency that is rapidly depleting. The current bull market, fuelled by stagnant capital and protected by a captured regulator, is a dangerous mirage. We need a market that rewards enterprise, not extraction. Anything less is not a vehicle for prosperity; it is a gambling house where the dice are loaded against the very people it claims to empower.