Sit in any Nepali dealing room, scroll any investor Viber group, and you will hear the same word within five minutes. Liquidity. The market fell because liquidity is tight. The market ran because liquidity is loose. Brokers say it, analysts say it, the guy who bought two lots of a microfinance last week says it. It is the single most-used word in Nepali market commentary. It is also, for most retail investors, the least understood. People use it as a mood, not a mechanism.
That is a shame, because getting NEPSE liquidity explained properly is close to owning the master key. NEPSE is a liquidity-driven market far more than it is an earnings-driven one. The index does not usually move because banks reported better profits. It moves because money got cheaper and easier to borrow or costlier and harder. If you can read the availability of money in the banking system, you can read the market’s biggest single driver. If you only watch the index, you are watching the smoke and calling it the fire.
This piece does one job. It defines what liquidity actually means in the Nepali context, explains the plumbing that connects it to share prices, and lists the specific signals worth watching. It sits alongside our piece on how NRB monetary policy moves NEPSE, which walks through the full policy transmission chain. Here we stay narrow: what the word means, and how to read it.
Liquidity is loanable money in the banking system
Start by throwing out the textbook definition. In global finance, “market liquidity” usually means how easily you can buy or sell an asset without moving its price. That meaning exists in Nepal too, and it matters for individual stocks (a thinly traded scrip is illiquid; you cannot exit a large holding without cratering the price). But that is not what people mean when they say “liquidity” on the NEPSE floor.
In Nepali market talk, liquidity means one specific thing: how much loanable money is sloshing around in the banking system. It is the supply of funds that banks and financial institutions have available to lend, over and above what regulation forces them to park aside. When banks are flush with deposits and are not lending all of it out, liquidity is loose. Money is cheap and plentiful. When banks have lent aggressively and deposits have not kept pace, liquidity is tight. Money is scarce and expensive.
That is the whole idea. Loose liquidity means cheap, plentiful money. Tight liquidity means dear, scarce money. Everything else is detail. But the detail is where you learn to read the signal, so let us go through it.
Where the money comes from, and where it leaks out
Bank deposits are the reservoir. In Nepal, that reservoir is fed heavily by remittances. Money sent home by Nepalis working abroad lands in a bank account, becomes a deposit, and becomes lendable. This is why the liquidity story here is tied to remittance inflows in a way it is not in most economies. When remittance growth is strong, deposits swell and liquidity loosens. When it stalls, the reservoir stops filling.
Money leaks out through credit demand and imports. When businesses and individuals borrow heavily, loans grow faster than deposits, and the free money in the system shrinks. Imports drain it in a second way. Nepal runs a large trade deficit, and paying for imported goods means converting rupees to foreign currency, which pulls liquidity and foreign-exchange reserves out of the domestic system at the same time. This is the classic Nepali squeeze: strong import demand plus weak remittance growth, and the reservoir empties from both ends.
That leaves one referee. Nepal Rastra Bank, the central bank, sits on top of the whole system and can add or remove money at will. So the level of liquidity at any moment is deposits (mostly remittance-fed) minus credit demand and import drainage, adjusted by whatever NRB is doing that week. You do not need to compute this. You need to watch three gauges that summarize it.
Signal one: the interbank rate
The single cleanest read on liquidity is the interbank rate, which is simply the interest rate banks charge each other for very short-term loans, usually overnight. Banks with a surplus of cash lend to banks that are short. The price of that overnight money is the interbank rate, and it is the most honest thermometer of banking-system liquidity you will find, because it is set by banks trading real money with each other, not by any committee.
Read it like this. When the interbank rate is low, banks are awash with cash, and almost nobody needs to borrow, so the price of overnight money falls toward the floor. A low interbank rate equals loose liquidity. When the interbank rate spikes, banks are scrambling for cash to meet their obligations and will pay up for it. High interbank rate equals tight liquidity. Reporting from NEPSE Trading suggests a rough rule of thumb watched by fundamental investors: an interbank rate down near or below the low single digits signals comfortable liquidity while a spike toward the high single digits flags building pressure and often precedes market corrections.
NRB does not let the interbank rate wander freely. It has set an interest rate corridor, a floor and a ceiling, and it intervenes to keep the interbank rate roughly inside that band. The policy rate (the repo rate) sits in the middle as the operational target. When the interbank rate trades well below the policy rate, that itself tells you liquidity is in surplus. The mechanics of that corridor belong to the monetary policy piece linked above. For our purposes the takeaway is simple. Watch the interbank rate. It is published, it is fresh, and it moves before the index does.
Signal two: CD ratio headroom
The second gauge measures how much lending room banks have left. This is the credit-to-deposit ratio, the CD ratio, which is exactly what it sounds like: loans divided by deposits. NRB caps it. Banks must keep their CD ratio at or below 90 percent, meaning they cannot lend out more than 90 rupees for every 100 rupees of deposits.
The gap between a bank’s actual CD ratio and that 90 percent ceiling is its lending headroom. That headroom is a direct read on system liquidity. When banks sit at, say, the mid-70s, they have plenty of room to lend, credit is easy, and liquidity is loose. When they crowd up against 90, they physically cannot lend more no matter how much a borrower wants it, and the system is tight. Per NRB data reported in mid-July 2025, the commercial-bank average CD ratio sat in the mid-to-high 70s, well below the ceiling, which is why that period read as comfortably liquid.
One piece of history is worth knowing, because it sharpens the reading. Until the 2021/22 monetary policy, NRB used a different measure called the CCD ratio, credit to core-capital-plus-deposit, capped at 85 percent. In 2021/22 it scrapped CCD and moved to the straight CD ratio at 90 percent, partly to expand banks’ lending capacity through the pandemic. So if you read older commentary referencing “CCD,” that is the ancestor of today’s CD ratio, not a separate thing. We unpack the CD ratio and its cousins in detail in banking ratios NPL, CD and CAR explained.
Signal three: NRB open-market operations
The third gauge is what the referee is doing. NRB manages liquidity actively through open-market operations, which is jargon for buying and selling short-term instruments to add or drain money.
When the system is tight and the interbank rate is climbing, NRB injects liquidity, most often through repo operations, lending cash to banks against collateral for a short period. That is money flowing in. When the system is too loose and NRB wants to mop up excess, it absorbs liquidity, most often through deposit collection, taking cash out of banks and paying them interest to hold it at the central bank. That is money flowing out.
You do not need to trade these instruments. You need to read the direction. A run of NRB liquidity injections tells you the central bank sees tightness and is fighting it. A run of deposit-collection absorptions tells you it sees surplus and is draining it. NRB publishes these operations, and reading them is like watching whether the referee is adding water to the reservoir or letting it out.
Why loose liquidity lifts NEPSE
Now the payoff. Why does the index rise when money is loose? Two channels, and both are mechanical rather than mysterious.
The first is the flow of money into shares. When liquidity is loose, deposit rates fall, because banks flush with cash do not need to compete hard for your money. A fixed deposit that paid handsomely in a tight year pays much less in a loose one. That pushes savers to look elsewhere for a return, and the share market is the obvious destination. This is the eternal seesaw between deposits and shares, which we look at head-on in fixed deposits versus stocks in Nepal. More rupees chasing the same pool of listed shares lifts prices. Simple demand.
The second channel is leverage, and in Nepal it is powerful. A large share of NEPSE turnover is bought with borrowed money, through margin loans and loans against shares, where investors pledge their existing holdings to borrow and buy more. Loose liquidity does two things to this. It makes those loans cheaper, because base rates fall. And it makes them easier to get, because banks with lending headroom are happy to extend share-backed credit. Cheaper, easier leverage means investors can control more shares with the same capital, which amplifies the buying and drives prices higher still.
That is the loop. Loose liquidity lowers deposit returns and pushes money toward shares, while simultaneously making the leverage used to buy those shares cheaper and more available. Both forces point the same way. Up.
And why tight liquidity pulls it down
Reverse every arrow. When liquidity tightens, deposit rates climb, and suddenly a safe fixed deposit competes hard with the risk of shares, so money flows back out of the market and into the bank. At the same time margin and share loans get costlier and, worse, harder to get, because banks pressed against the CD ceiling cannot extend fresh credit and may call in what they have already lent. Forced deleveraging is brutal. Investors who bought on margin have to sell to service or repay loans, and their selling drives prices down, which triggers more margin calls, which drives more selling. The loop that lifted the market in easy times becomes the mechanism that guts it in hard times.
The clearest recent illustration was 2021 into 2022. Through 2021, remittance-fed deposits and easy credit produced loose conditions, and NEPSE ran hot; market capitalization rose sharply that year on the back of that liquidity, with reporting citing a jump of over 90 percent in 2021 versus 2020. Then the reservoir emptied from both ends. Credit had grown far faster than deposits, imports surged, remittance growth softened, the interbank rate climbed, banks jammed up against the CD ceiling, and margin financing dried up. The market that liquidity had lifted, tight liquidity pulled down. Nothing about corporate earnings explained the round trip. Liquidity did.
The verdict: watch the money, not just the index
Here is the position, stated plainly. NEPSE is a liquidity-driven market. Earnings matter at the level of an individual stock, and over long horizons a good business will out-earn a bad one. But the tide that lifts or sinks the whole index is the availability of money in the banking system, not the aggregate profit of listed companies. This is why the market can rally in a year of mediocre earnings and sink in a year of decent ones. The index follows the money.
So the retail investor who checks the interbank rate, watches CD-ratio headroom, and notices whether NRB is injecting or absorbing liquidity genuinely understands more about where NEPSE is heading than the investor who stares at the index all day. The first is reading the driver. The second is reading the result. When you next hear someone in a Viber group announce that “liquidity is loose,” you will know exactly what they are claiming, which gauges would confirm it, and why it points the index up. That is not a small edge. In a market this liquidity-sensitive, it may be the biggest one available to an ordinary investor. If you want the mechanism of how NRB’s policy choices feed into all of this, read the monetary policy piece next.
This is analysis, not financial advice.
