Nepal’s central bank has retained its "cautiously flexible" monetary policy stance, saying the approach will help maintain a low-cost economy, bolster private sector confidence and support the government's ambitious economic growth target.

Unveiling the monetary policy for fiscal year 2026-27 on Monday, Nepal Rastra Bank (NRB) said it would ensure adequate liquidity and prudent foreign exchange management to achieve 7 percent economic growth while keeping inflation at around 5.5 percent. It also aims to maintain foreign exchange reserves sufficient to cover at least seven months of imports of goods and services.

The government has set a target of 7 percent economic growth and capped inflation at 6 percent for the coming fiscal year.

The central bank said inflationary pressures stemming from external factors are expected to ease gradually.

"As the current foreign exchange reserve position remains comfortable and the overall macroeconomic environment is favourable, the cautiously flexible policy stance adopted so far has been continued," Governor Biswo Nath Poudel said while announcing the policy.

The central bank left all key policy rates unchanged, including the policy rate under the interest rate corridor, the standing deposit facility rate and the bank rate.

With ample liquidity in the banking system and robust foreign exchange reserves, the bank rate has been retained at 5.75 percent and the standing deposit facility rate at 3 percent.

Among the policy changes, the NRB said it would ease the loan-to-value ratio for large electric vehicles used in public transportation.

The ceiling for personal overdraft loans has been kept unchanged at Rs10 million, while the central bank said commercial lending would continue to be directed towards productive sectors.

The monetary policy has also raised the unsecured loan ceiling for microfinance borrowers to Rs1.5 million.

To promote digital banking and reduce operating costs, the NRB has continued the provision allowing branch consolidation in metropolitan areas. It will also study the introduction of personal credit scoring systems and peer-to-peer financial transactions.

The central bank identified rising non-performing loans (NPLs) and pressure on banks' capital buffers as major challenges. It pledged special programmes to revive sick industries and resolve problematic loans.

Existing provisions relating to the cash reserve ratio, statutory liquidity ratio and standing liquidity facility remain unchanged.

To improve liquidity management arising from foreign currency purchases, commercial banks will be encouraged to invest in foreign government securities. NRB also plans to introduce sterilised interventions to absorb excess liquidity generated by foreign currency purchases.

Governor Poudel said banks and financial institutions would be reclassified according to their size and business nature, paving the way for specialised banking services.

Banks will also be given greater flexibility to open or close branches as part of efforts to promote digital financial services and reduce operating expenses.

The governor said institutional mechanisms to protect depositors would be strengthened. Better liquidity management, he said, would help banks avoid cutting deposit interest rates during periods of excess liquidity, benefiting both depositors and creditors.

The central bank also announced measures to address unlimited liabilities arising from personal guarantees used as loan collateral. It plans to ease banking restrictions on borrowers blacklisted over dishonoured cheques and introduce measures to help stressed borrowers and revive distressed industries.

Similarly, share and margin lending limits will be determined based on the strength of financial institutions, while financing terms for large electric vehicles used as public transport will be relaxed.

Although average inflation stood at just 2.66 percent during the first 10 months of the current fiscal year, year-on-year inflation reached 5.04 percent in mid-April.

NRB said inflationary pressures driven by higher petroleum and food prices are likely to persist for a few more months before easing from the fourth quarter of the next fiscal year. Inflation is projected to remain within 5.5 percent.

The central bank expects the current liquidity and interest rate environment to support economic expansion.

It said the government's expansionary fiscal policy, including higher public spending, income tax cuts and structural reforms, would boost aggregate demand, stimulate economic activity and gradually absorb excess liquidity.

"However, additional liquidity inflows from remittances, tourism income and public expenditure are expected to keep liquidity management challenging," the policy said.

Despite an expected rise in imports as economic activity gathers pace, strong remittance inflows and growing service exports, particularly tourism, are expected to keep both the current account and the balance of payments in surplus, allowing foreign exchange reserves to grow further.

NRB has retained the fixed exchange rate regime with the Indian rupee as the nominal anchor of monetary policy.

Open market operations will continue to keep the interbank interest rate close to the policy rate, using instruments of varying maturities for both structural and day-to-day liquidity management.

The central bank estimates that Nepal's economy will grow by 3.85 percent in the current fiscal year, driven mainly by the services sector.

A separate macroeconomic outlook released by NRB said the economy is expected to improve moderately in 2026-27, supported by stronger performance in agriculture, industry and services.

While paddy production could be affected by a super El Niño, improvements in agricultural modernisation, timely fertiliser supplies and crop diversification are expected to offset part of the impact.

Industrial activity is projected to recover gradually, supported by stable input prices, the completion of new hydropower projects, reconstruction work and government reforms.

The services sector is expected to remain the main driver of growth, fuelled by robust remittance inflows, expanding digital services, rising domestic and international tourist arrivals, and growth in transportation, accommodation and food services.

The central bank also expects tax reforms that increase disposable income to stimulate consumption and support growth.

It said a stable majority government would strengthen private sector confidence, encourage investment and improve capital spending.

According to NRB, these policy and institutional factors, combined with continued sectoral recovery, make the government's 7 percent growth target achievable, provided no major external shocks occur.

However, it warned that escalating geopolitical tensions in West Asia, disruptions to global supply chains and the effects of a super El Niño pose significant risks to inflation and growth.

West Asia remains critical for Nepal as a major destination for migrant workers and an important source of global energy supplies.

NRB warned that a prolonged conflict could reduce remittance inflows, drive up fuel prices, disrupt supply chains and undermine macroeconomic stability.

Higher energy prices could fuel inflation, weaken domestic demand and investment, and worsen the balance of payments.

Beyond geopolitical risks, climate-related shocks linked to a super El Niño could disrupt the monsoon, trigger droughts and affect agricultural production.

The central bank also stressed that sustaining growth would depend heavily on the government's ability to accelerate capital spending and implement the proposed legal and policy reforms in a timely manner.