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Elective Management of Financial Institutions

Management of Financial InstitutionsTU Board 2080

State the goal of monetary policy.

2

Answer

· Based on the official syllabus and past papers
Updated

The primary goal of monetary policy is to achieve and maintain price stability, economic stability, and sustainable economic growth in an economy. Specifically, it aims to:

Nepal Rastra Bank’s Balance Sheet (Simplified) – Liquidity IDr.Cr.To Commercial Banks (Lending for Growth)0To Government Securities (Open Market Operations)0By Deposits (Public Savings)0By Foreign Exchange Reserves (FX Reserves)000
NRB’s liquidity injection (₹800B loans to banks) funded by public deposits and FX reserves to stimulate economic growth.
2022Repo rate hike(7.5% → 8.5%)2023Open marketoperations (sold ₹50B 2024Cash reserve ratioraised (3% → 4%)
NRB’s tools to curb inflation (2022–2024) via monetary tightening.
Years (2020–2030)Inflation Rate (%)OInflation Target (NRB: 3–6%)Actual Inflation (2023)Lower Target (3%)TP*Upper Target (6%)TP*Actual (2023: 5.1%)AP
NRB’s inflation target band (3–6%) vs. actual rate (5.1% in 2023) under current policy.
  1. Control Inflation: By regulating the money supply, monetary policy ensures that inflation remains within an acceptable range (typically 3–6% in Nepal).
  2. Promote Economic Growth: By influencing interest rates, credit availability, and liquidity, it supports investment, employment, and overall economic expansion.
  3. Ensure Financial Stability: By managing liquidity and interest rates, it prevents financial crises, such as bank runs or asset bubbles.
  4. Maintain Exchange Rate Stability: By regulating foreign exchange reserves and interest rates, it helps stabilize the currency (e.g., the Nepalese rupee) against external shocks.
  5. Support Government Fiscal Policy: By coordinating with fiscal policy, it ensures macroeconomic stability and sustainable development.

In Nepal, the Nepal Rastra Bank (NRB) implements monetary policy through tools like repo rate adjustments, open market operations, and reserve requirements to achieve these objectives.

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