Nepal’s inflation drops to 2.42%, BoP surplus hits Rs 501 bn as remittance surge strengthens external sector

KATHMANDU: Nepal’s macroeconomic stability strengthened markedly in the first six months of fiscal year 2025/26, with inflation moderating sharply, foreign exchange reserves reaching historic highs, and the balance of payments (BoP) recording a robust surplus, according to the latest Nepal Rastra Bank (NRB) macroeconomic and financial situation report based on data ending mid-January.

Inflation Falls to Multi-Year Low

Year-on-year consumer price inflation declined to 2.42 percent in mid-January 2026, down from 5.41 percent a year ago, reflecting easing price pressures particularly in food items. Food and beverage prices actually contracted 0.09 percent, while non-food and services inflation stood at 3.81 percent. Average inflation for the first half of the fiscal year remained just 1.70 percent, significantly lower than 4.97 percent in the same period last year.

Price declines were recorded in pulses, spices and cereal grains, while fruit, ghee and oil saw moderate increases. In the non-food category, miscellaneous goods and services rose sharply by 21.75 percent, and education by 7.56 percent. Provincial data show inflation highest in Madhesh (3.37%) and Koshi (3.25%) and lowest in Karnali (1.08%).

External Sector Posts Strong Surplus

Nepal’s current account surplus widened to Rs 429.91 billion, while the overall BoP surplus reached Rs 501.24 billion, more than double the previous year’s level. In US dollar terms, the BoP surplus stood at $3.54 billion. The improvement is driven primarily by a surge in remittances and higher exports.

Remittance inflows jumped 39.1 percent to Rs 1,062.93 billion in six months; in dollar terms, they rose 32.3 percent to $7.5 billion. In the Poush month alone, remittances amounted to Rs 192.62 billion. Net secondary income reached Rs 1,168.02 billion. The number of new foreign labor approvals exceeded 206,800, while 194,733 workers renewed permits.

Trade Deficit Still Wide Despite Export Growth

Merchandise exports surged 43.8 percent to Rs 142.02 billion, with strong growth in soybean oil, cardamom, palm oil and footwear exports. Exports to India rose 57 percent, though shipments to China fell sharply.

Imports, however, also increased 14.2 percent to Rs 939.02 billion, driven by transport equipment, fertilizer and precious metals. As a result, the trade deficit widened 10.1 percent to Rs 797 billion, though the export-import ratio improved to 15.1 percent.

Foreign Exchange Reserves at Record Level

Gross foreign exchange reserves climbed 21.1 percent to Rs 3,242.45 billion (USD 22.47 billion). The reserves are sufficient to cover 18.1 months of prospective merchandise and services imports. Reserves-to-GDP stood at 53.1 percent, and reserves-to-imports at 150.7 percent, indicating strong external buffers. Indian currency accounts for 22.3 percent of total reserves.

Government Finances Under Pressure

Government expenditure totaled Rs 690.22 billion, while revenue mobilization reached Rs 577.40 billion, creating fiscal strain. Recurrent expenditure dominated at Rs 487.14 billion, while capital spending remained low at Rs 49.43 billion, declining year-on-year. Financial management expenditure stood at Rs 153.65 billion. Cash balances with NRB surged to Rs 346.37 billion.

Money Supply and Banking Activity

Broad money (M2) expanded 5.4 percent in the review period and 14.2 percent year-on-year. Deposits at banks and financial institutions rose 5.7 percent to Rs 7,681.35 billion, while private sector credit grew only 3.6 percent to Rs 5,695.17 billion, indicating cautious lending. Credit to agriculture fell, while loans to consumption, construction and transportation increased.

NRB absorbed a net Rs 28,699.90 billion in liquidity through various instruments, reflecting excess liquidity in the system. The central bank also injected Rs 493.04 billion through net USD purchases.

Interest Rates Decline

The weighted average 91-day Treasury bill rate declined to 2.35 percent, and the inter-bank rate stood at 2.75 percent. Commercial banks’ average deposit and lending rates fell to 3.56 percent and 7.12 percent respectively, easing borrowing costs. Base rates across all bank categories declined year-on-year.

Financial Sector Stability

A total of 106 BFIs operate through 11,503 branches nationwide. Deposit accounts reached 61.78 million, and loan accounts 2.02 million. Core capital to risk-weighted assets stands at 9.58 percent, and total capital adequacy at 12.56 percent. The NPL ratio remains at 5.42 percent, signaling moderate credit risk.

Capital Market and Digital Transactions

The NEPSE index stood at 2,641, with market capitalization at Rs 4,435.03 billion (72.62% of GDP). Total listed securities worth Rs 48.44 billion were added in six months. Digital transactions continued to expand: mobile banking processed 68.26 million transactions worth Rs 557.48 billion, while QR payments handled Rs 129.18 billion.