A REPORT ON MONETARY POLICY OF NEPAL

A REPORT ON MONETARY POLICY OF NEPAL
PREPARED BY:
SIDDHANT PANDEY
SUDIP SHARMA
SUJATA ARYAL
| MICROECONOMICS |2078/12/08|
INTRODUCTION:
Monetary policy is one of the important

macroeconomic policies which is practiced by the
monetary authority to achieve predetermined
objective through the change in money supply,
credit and rate of interest in the economy. In other
words whatever policies adopt by central bank for
achieving national objective is called monetary
policy.
R.P. Kent defines monetary policy as "The
management of the expansion and contraction of
the volume of money in circulation for the explicit
purpose of attaining a specific objective such as full
employment."
TYPES OF MONETARY POLICY:
1.Restrictive (Contractionary) Monetary Policy:

» A monetary policy designed to curtail aggregate
demand is called restrictive monetary policy. It is
an action taken by the central bank to decrease
the money supply in the economy. It might do so
by selling government securities in the open
market by raising reserve requirements of
member banks.
2.Expansionary Monetary Policy:

» A monetary policy designed to increase
aggregate demand and to overcome a recession
or a depression or recessionary gap is called
expansionary monetary policy. An expansionary
monetary policy is an action taken by the central
bank to increase the money supply in the
economy.
INSTRUMENTS OF MONETARY POLICY:
1.General/ Quantitative/ Indirect Instrument:

» They affect the level of aggregate demand through
the supply of money, cost of money, availability of
credit. The quantitative controls are as below:
(a) Open market operation: It refers to the
purchase and sell of the government security by the
central bank in the open market. If central bank
wants to increase money supply in the economy
then central bank purchase government security
from public. On the other hand, if central wants to
decrease money supply then central bank sells
government security.
(b) Bank Rate or Discount Rate: It is the rate of
interest at which the commercial bank borrow fund
from the central bank against of government and
other approved securities. If central bank wants to
increase money supply in the economy then central
bank reduces the bank rate. On the other hand, if
central wants to decrease money supply then central
bank increases bank rate.
(c) Minimum Reserve Requirement Ratio: Reserves
are the portions of bank deposits that banks hold
but do not loan out. Banks are compelled either by
law or by custom to keep certain % of their deposits
as reserve with central bank or cash in their vault. If
central bank wants to increase money supply in the
economy then central bank reduces the CRR. On the
other hand, if central wants to decrease money
supply then central bank increases the CRR.
2. Selective/ Qualitative/ Direct Instrument:

(a) Change in Margin: Commercial banks provide
loans to their customer against some tangible
collaterals. But commercial banks do not provide the
loan as much as the full value of the collateral. The
difference between the value of collateral and the
amount of loan provided by commercial bank is
called margin. If central bank wants to increase
money supply in the economy then central bank
suggest to the bank to reduce the margin. On the
other hand, if central wants to decrease money
supply then central bank suggest to the bank to
increase the margin.
(b) Regulation of consumer credit: Under this
instrument, a certain percentage of consumer
durable goods is paid by the consumer in cash. The
balance is financed through the bank credit which is
repayable by the consumer in installment. The
central bank controls the consumer credit by
changing the borrowing amount for the purchases of
the consumer durable and the periods over which
the installment can be extended.
(c) Rationing of credit: This instrument is used to
control credit provided by the commercial banks. For
this the central bank may fix the limit of maximum
loans and advances to the commercial banks for
specific sector or categories.
(d) Moral Suasion: Moral suasion means advising,
requesting the commercial banks to cooperate with
the central bank in implementing its general
monetary policy.
Indicators of Monetary Policy:
It indicates the direction and strength of monetary
policy.
1. Money supply
2. Interest rate
3. High power money
Targets of Monetary Policy:

The specific values of macroeconomic variables including
interest rate, money supply, bank credit and exchange
rates that a monetary authority pursues in the course of
conducting monetary policy are called targets of
monetary policy. The choice of target of the monetary
policy is determined through which money supply affects
economic growth, employment and prices. In order to
become good target for monetary policy, the target
variable should be early measurable, attainable and
closely related to the higher level goal variables. The
main targets of monetary policy are money supply,
interest rates and bank credit.
Objective of Monetary Policy:
1. Price Stability: The most important objective of

monetary policy is to establish price stability.
Inflation and deflation both are harmful to the
economy. Inflation increases gap between rich and
poor. Deflation reduces production and employment
in the economy. Hence monetary authority tries to
maintain price stability in the economy.
2. High economic Growth: High economic growth can
be achieved through expansionary monetary policy.
For this central bank increases money supply which
reduces rate of interest. The reduction of rate of
interest induces investment which results into
increase in production, employment and income
level and thereby economic growth.
3. Higher Level of Employment: Higher unemployment
rate is one of the major economic issues in most of
the developing countries like Nepal. The problem of
unemployment is due to the lack of proper
utilization of human resources. Expansionary
monetary policy can be conducted to increase the
level of employment.
4. Stability of Foreign Exchange Rate: At present all
the countries are involving in international trade. If
there is instability in exchange rate, it creates so
many disturbance in export and import activities.
Hence monetary authority tries to maintain
exchange rate stability.
5. Equitable Distribution of Income: Monetary policy
also helpful to reduce the inequality to some extent.
For this, central bank suggest to the banks provide
loan to poorer people at lower rate of interest.

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A REPORT ON MONETARY POLICY OF NEPAL

Monetary policy is one of the important

1.Restrictive (Contractionary) Monetary Policy:

2.Expansionary Monetary Policy:

1.General/ Quantitative/ Indirect Instrument:

2. Selective/ Qualitative/ Direct Instrument:

Targets of Monetary Policy:

1. Price Stability: The most important objective of

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