Ask most Nepali savers why they keep money in a fixed deposit instead of buying shares, and you get an answer about character. “I am the cautious type.” “I do not like risk.” “Stocks are gambling.” Ask the ones who finally opened a Demat account in 2021 why they did, and you get the opposite: “Everyone was making money.” Both answers describe a feeling. Neither describes the thing that actually decided the outcome.
The fixed deposit vs. stocks Nepal decision is not really a personality question. It is largely a function of the interest rate cycle, and the uncomfortable truth is that most people get the timing exactly backwards. They sit in fixed deposits when FD rates are low and shares are cheap. Then they pile into shares after rates have collapsed and the market has already run. The cautious saver and the bold investor often end up being the same person, just eighteen months apart, and usually on the wrong side of the move.
This piece is about the mechanism underneath that mistake. Once you see how deposit rates move with bank liquidity and Nepal Rastra Bank (NRB) policy and why high FD rates tend to show up exactly when the stock market is weak, the choice stops looking like a temperament test and starts looking like what it is: a reading of where you are in the cycle.
Why FD rates move at all
A fixed deposit (FD) is money you lock with a bank for a set term, say one or two years, in exchange for a fixed interest rate. The rate is not a number the bank picks out of goodwill. It is a price set by how badly banks need your deposit.
Banks in Nepal lend out far more than their own capital. They fund loans largely from deposits. When the banking system is short of loanable funds, banks compete for deposits by raising the rates they offer. When the system is flush with cash and loan demand is weak, they have no reason to pay you much, and deposit rates fall.
The single best gauge of which world you are in is liquidity. When liquidity is tight, the credit-to-deposit pressure rises, the interbank rate (what banks charge each other for overnight money) climbs, and FD rates follow it up. When liquidity is loose, the interbank rate sinks, sometimes below NRB’s policy rate, and deposit rates drift down. As of mid-2026, the interbank rate was reported around and average deposit rates near, a picture of surplus liquidity. That is the cheap-money end of the cycle. (For how the central bank steers all of this, see our explainer on NRB monetary policy and NEPSE.)
What NRB actually controls
NRB does not announce your FD rate. It sets the conditions that decide it, mainly through the interest rate corridor: a bank rate at the top as a ceiling, a policy repo rate in the middle as the operational target, and a deposit facility rate at the bottom as a floor. Recent figures put the bank rate near, the policy repo rate near, and the deposit collection floor below that.
Think of the corridor as the band the central bank wants short-term money to trade inside. When NRB wants to cool an overheating economy or defend foreign reserves, it tightens: it drains liquidity, nudges the corridor up, and lets bank rates rise. Loans get more expensive, deposits get more attractive, and FD rates climb. When NRB wants to support growth, it does the reverse, floods the system with liquidity, and rates fall across the board.
NRB also leans directly on the stock market when it wants to. In the 2078/79 (2021/22) tightening, the central bank capped loans taken against share collateral, the much-discussed NPR 40/120 million margin loan limit. That single rule pulled leverage out of the market at exactly the moment rates were rising. Keep that in mind: the same policy turn that makes your FD pay more is often the policy turn that knocks the wind out of NEPSE.
The inverse pattern, and why it is not a coincidence
Here is the part that matters and the part most savers never connect. High FD rates and weak stock markets tend to arrive together. Low FD rates and strong stock markets tend to arrive together. This is not bad luck. It is the mechanism.
Three forces push in the same direction. First, the discount-rate effect: a share is worth the future earnings it will deliver, and when the safe return on cash is high, those future earnings are worth less today, so valuations compress. Second, the competition effect: if a bank will pay you a high guaranteed rate with no price risk, the equity market has to offer a lot more to be worth the trouble, and money rotates out of shares into deposits. Third, the leverage effect: roughly half of NEPSE’s turnover has historically been fuelled by margin loans, and when rates rise and credit tightens, that borrowed money gets pulled, removing a buyer.
Nepal’s own recent history is almost a controlled experiment. Through 2020 and into 2021, the pandemic left the banking system awash in liquidity, deposit rates fell hard, and the NEPSE index ran to an all-time high around 3,200 in August 2021, per New Business Age and Investopaper. Then liquidity dried up, NRB tightened, deposit rates surged into double digits, the margin-loan cap landed, and the index fell to roughly 1,615 by 2023, a drop of about half. The rotation worked exactly as the mechanism predicts. As FD rates climbed, shares fell. As shares fell, savers who had crowded in near the top sold out near the bottom, often to lock into the very fixed deposits that were now paying so well.
That is the trap in one sentence: by the time the FD looks irresistible, the stock market has usually already done its damage, and by the time FD rates look pathetic, the next equity move has usually already begun. If you want the longer version of how these phases play out, read our piece on NEPSE bull and bear markets.
The number that fools everyone: after-tax FD return
When a saver compares an FD to the stock market, the FD number usually quoted is the headline (gross) rate. That number is wrong for your pocket, because interest is taxed at source.
Under the Income Tax Act, 2058, interest a bank pays an individual on deposits is subject to a 5% final withholding tax, deducted before the money reaches you. (This is the lower personal-savings rate; interest paid to companies is withheld at a higher rate, commonly 15%.) “Final” means it is settled; you do not file again on it, but it also means your real return is the gross rate minus that 5% slice. Confirm the current figure with finance before you rely on it, because finance acts adjust these things.
Work on a concrete example. You place NPR 10 lakh in a one-year FD at a 9% gross rate. Gross interest is NPR 90,000. The bank withholds 5%, NPR 4,500, and credits you NPR 85,500. Your real return is 8.55%, not 9%. Now sharpen it with inflation. If consumer prices rose around the same year, the real, after-tax, after-inflation return on that “safe” deposit is a good deal thinner than the sticker suggested. An FD protects your rupee count. It does not always protect your purchasing power.
This matters for the comparison because the equity side has its own, different tax treatment, and savers rarely line them up correctly. Capital gains on shares are taxed when you sell at a profit, at rates that depend on how long you held them and whether you are an individual or an institution; the details are in our guide to capital gains tax on NEPSE shares. Dividends carry their own withholding too. The honest comparison is after-tax FD return against after-tax expected equity return, not the gross FD rate against a dream.
The trade-offs the rate cycle does not erase
Timing the cycle better does not turn shares into a sure thing. Two differences between an FD and a portfolio of NEPSE stocks stay true no matter where rates are.
The first is certainty. An FD has a known rate, a known maturity, and effectively no price risk if you hold to term. A share has none of that. NEPSE can fall 50% in two years, as it just did, and a single company can fall much further or be delisted. If you will need the money on a fixed date, for a child’s admission, a land payment, or a medical bill, the FD is not the timid choice; it is the correct one. Matching the asset to when you need the cash beats any view on the cycle.
The second is liquidity, and here the comparison is less one-sided than people assume. Breaking an FD early usually means forfeiting a chunk of the interest, so the “liquid” deposit is liquid at a penalty. Shares, by contrast, can be sold on any trading day through your broker, with proceeds settling within a few days, assuming there is a buyer at a price you will accept. In a falling market that last clause does real damage: liquidity you cannot use at an acceptable price is not much comfort. Both instruments have a liquidity catch. They are just different catches.
If you have never bought a share, the plumbing is simpler than it looks: you need a Demat account and a Mero Share login before you can do anything, covered in how to open a Demat and Mero Share account in Nepal. For savers who want equity exposure without picking stocks, a mutual fund is the halfway house worth understanding before you decide.
A clear position
So here is the verdict, stated plainly because hedging it would waste your time.
When FD rates are high, the rational saver locks them in and stays cautious on stocks. High rates almost always mean tight liquidity and a tightening central bank, which is the worst weather for equities and the best terms you will get on a deposit. A two-year FD at a genuinely high rate is a gift the cycle hands you only occasionally. Take it, and take it for a long tenure so you keep the rate after it falls.
When rates collapse, the calculus flips. Cheap money flows back toward shares, and the early part of that rotation is where most of the equity return is made. But this is also where the trap snaps shut. By the time the rotation is obvious, by the time your neighbors are quoting daily gains and the FD looks insulting, the easy money is gone. Chasing the market after the rotation is loud and well underway is precisely how late entrants got hurt in 2021 and 2022.
The discipline, then, is almost the reverse of instinct. Lean toward fixed deposits when they pay the most and everyone hates the stock market. Lean toward shares when deposits pay little and the market is quiet, not when it is roaring. You will rarely feel comfortable doing either, because the comfortable trade is usually the late one.
None of this requires predicting the next NRB decision to the day. It requires noticing which side of the cycle you are standing on, reading FD rates and liquidity as the signal they are, and refusing to let the headline rate or the crowd decide for you. The saver and the investor are not two kinds of people. They are the same person, asked to act sensibly at different points in the same rate cycle.
This is analysis, not financial advice.
