A Concept Note on

Exploring the role of Monetary Policy in multinational Investment Decision-making in

Nepal

By:
Sangam Neupane
(Kathmandu, Nepal)

For:
Doctor of Philosophy in Management

To,
Dr. KN Modi University, Newai, Rajasthan, India
February 2024
 1. Background of the study
Monetary policy is the macroeconomic policy laid down by the central bank. It involves the
management of money supply and interest rate and is the demand side economic policy used by
the government of a country to achieve macroeconomic objectives like inflation, consumption,
growth, and liquidity. In Nepal, the monetary policy of the Nepal Rastra Bank is aimed at
managing the quantity of money to meet the requirements of different sectors of the economy
and to increase the pace of economic growth. The NRB implements the monetary policy through
open market operations, bank rate policy, reserve system, credit control policy, moral persuasion,
and through many other instruments. Using any of these instruments will lead to changes in the
interest rate or the money supply in the economy. Monetary policy can be expansionary and
contractionary. Increasing the money supply and reducing interest rates indicate an expansionary
policy. The reverse of this is a contractionary monetary policy. For instance, liquidity is
important for an economy to spur growth. To maintain liquidity, the NRB is dependent on the
monetary policy. By purchasing bonds through open market operations, the NRB introduces
money into the system and reduces the interest rate.
Foreign direct investment plays a significant role in the development of modern economic
relations. Most developing countries lack the resources required to meet the financial
requirements of economic development. They require foreign capital and technology for socio-
economic development. Previously, much of the resource gap was managed through foreign
loans and grants, but due to the worldwide economic and financial crisis of the 1980s, many
donor countries curtailed their Official Development Assistance, and therefore, foreign private
capital remained the only alternative source available to many developing countries. Thus,
foreign investment can assist industrial growth and hence, economic development in several
ways, like: it supplementing domestic private capital, demonstrating how industrial expansion
and development could take place, bringing in technical know-how and managerial expertise, it
can develop organized capital market in the country, it promotes employment opportunities and
also helps national savings and it, in the form of collaboration imparts training and development
to entrepreneurs and promoters. The substantial flow of FDI to a least developed country like
Nepal is instrumental in developing and expanding its industrial base, promoting industries of
national priority and having a comparative advantage, improving the competitiveness of the
existing industries thereby increasing industrial productivity and v ultimately contributing to
creating a broad-based and high economic growth rate. Nepal has made a promising start in
implementing market-oriented reform and promoting FDI as part of it, but it has a long way to go
in reaping the benefits from the greater global integration through FDI. The foreign investment
scenario in Nepal has been dismal. Despite its free-market reforms and incentives, Nepal has
attracted only a small portion of foreign investment flowing to South Asia. Nepal has endeavored
to infuse FDI into the economy since 1981 when acts and policies governing FDI were
legislated. However, there was Indian investment in Nepal before the legislation of such acts and
policies. The analysis of the flow of foreign investment in the country reveals that it commenced
flowing remarkably into Nepal from the time when the democratically elected first government
of Nepali Congress adopted liberal policies in the matter of getting private domestic or foreign
investors involved in the economic activities of a country. In the subsequent period of the 1980s
Nepalese economy was suffering from various macroeconomic crises like increasing negative
balance of payment, high rate of inflation, growth of debt burden, budget deficit, etc., due to
which it was difficult to attract FDI in Nepal. Along with this, the other causes that were
responsible for the slow flow of FDI were the shortage of electricity in that period from which
Nepal was suffering, which is very essential for establishing industries and attracting FDI into
the country. Besides this, the country was suffering from poor infrastructural facilities like roads,
communication, etc. Before, 1991, there was no notable flow of FDI due to the restrictive
policies imposed during the period of 1980s. The implementation of the Structural Adjustment
Program and Structural Adjustment Facility paved the way for liberalizing and privatizing the
economy and that contributed to.
2. Research problem in Nepalese Context
Monetary policy in Nepal started with the establishment of the Nepal Rastra Bank in 1956. Nepal
Rastra Bank was established under the Nepal Rastra Bank Act 1955. At the time, both Nepalese
and Indian currencies were in circulation. To remedy this, and to establish Nepalese currency as
the only currency for domestic transactions, the Foreign Exchange Act 1962 was introduced.
Along with the Commercial Bank Act, of 1968, this act expanded the domain of operation of
NRB. In 1966, NRB began conducting monetary policy through interest rate regulation and
reserve control. It introduced monetary policy instruments like Credit Reserve Ratio (CRR) and
fixed interest rates on deposits and loans to implement the foregoing policy objectives; over the
next few decades, NRB introduced a few more policy instruments like Statutory Liquidity Ratio
(SLR). Despite an increasing emphasis on conducting monetary policy during this period, no
formal framework was developed to aid monetary policy formulation and implementation. In
mid 1980s NRB began approaching monetary policy through the use of indirect methods. Under
this approach, it deregulated interest rates starting in 1984, introduced Open Market Operations
(OMOs) in 1988, and treasury bills in 1994. It also abandoned credit ceilings in 1991/92 to
facilitate the indirect approach to monetary policy. Around the same time, in 1993, the exchange
rate with Indian currency was fixed at 1.6 Nepalese Rupees per Indian Rupees. Furthermore,
NRB introduced formal policy objectives of price and Balance of Payment (BoP) stability. These
reforms during the 1980s and the 1990s paved the way for the introduction of a formal monetary
policy framework in the early 2000s.
In 2002, the Nepal Rastra Bank Act was introduced. NRB Act provided a clear framework for
conducting monetary policy comprised of policy instruments, operating targets, nominal anchors,
intermediate targets, and policy objectives. Under this approach, NRB uses monetary aggregates
as an intermediate target, exchange rate as a nominal anchor, excess reserve as an operating
target, and various monetary policy instruments. The act also updated regulations surrounding
OMOs and made it possible for NRB to conduct OMOs at the discretion of the Open Market
Operation Transactions Committee (OMOTC), rather than having to wait for Banks and
Financial Institutions (BFIs) to request the operation. Similarly, a provision was made to
formally announce monetary policy; NRB has been announcing yearly monetary policy ever
since. Furthermore, many new instruments were added under the framework to ease monetary
policy operations; an example of this is the Liquidity Monitoring and Forecasting Framework
(LMFF) which has been used by the NRB since 2004/05 to facilitate OMOs. The primary
objectives of Nepalese monetary policy are price stability and external sector stability. The
rationale for these objectives comes from the large trade account with India and the exchange
rate peg with Indian currency. Results in Budha (2015) and Suzuki (2019) suggest that the long-
run inflation of the Nepalese and Indian economies converge. As such, the goals of price and
external stability are indispensable. NRB manipulates broad money (M2) balance to attain the
required goal. Since NRB does not have direct control over M2, it uses excess reserves of BFIs
to attain the desired balance of M2; in recent years, it has been targeting an annual M2 growth
rate of 18%, which it attains through the preceding scheme. Excess reserves can be influenced
through a variety of direct monetary policy instruments. NRB currently uses CRR, bank rate,
OMO's interest rate corridor, etc.
While the intermediate target and the nominal anchor have not changed in a long time, policy
instruments have been both introduced and discontinued by the requirements of NRB. For
instance, Statutory Liquidity Ratio (SLR) was discontinued in 1993 and reintroduced again in
2009. On each monetary policy announcement, NRB updates its stance on the use of various
policy instruments discussed in the foregoing. Monetary policy actions to be carried out through
policy instruments like CRR, Interest rate corridor, and bank rate are precisely defined through
the announcement, while those involving policy instruments like OMOs are less precise. In this
sense, OMOs are used to flatten short-term volatility in the market and other policy instruments
are used to flatten longer-term volatility.
Remittance inflows have come to be a major factor in Nepalese monetary policy in present times
(Maskay et al., 2015). The period of 2010-2015 was associated with frequent episodes of
significant remittance inflows. This trend extends to the period after 2015, primarily due to the
earthquake of 2015. Remittance inflows arrive in the economy in the form of foreign currency.
Owing to the strict capital controls, Nepalese citizens must exchange the received foreign
currency for Nepalese currency to engage in the market. As such, NRB liquidates foreign
currency, while simultaneously injecting Nepalese currency into the market. This has an after-
effect of a surge in M2 balance. The sudden surge in M2 balance has monetary repercussions as
it can lead to a rise in inflation unless proper monetary policy is put in place to counterbalance
the surge in M2 (Maskay et al., 2015). Nepal Rastra Bank attempts to sterilize the remittance
inflow through the use of various instruments. One such instrument is the Liquidity Monitoring
and Forecasting Framework (LMFF) which is used to monitor liquidity in the market.
Multinational Finance is the management of finance in an international business environment;
that is, trading and making money through the exchange of foreign currency. International
financial activities help organizations to connect with international dealings with overseas
business partners- customers, suppliers, lenders, etc. It is also used by government organizations
and non-profit institutions. International finance, sometimes known as international
macroeconomics, is the study of monetary interactions between two or more countries, focusing
on areas such as foreign direct investment and currency exchange rates. International finance is
the study of monetary interactions that transpire between two or more countries. International
finance focuses on areas such as foreign direct investment and currency exchange rates.
Increased globalization has magnified the importance of international finance. An initiative
known as the Bretton Woods system emerged from a 1944 conference attended by 40 nations and
aims to standardize international monetary exchanges and policies in a broader effort to nurture
post-World War II economic stability.
International finance deals with the economic interactions between multiple countries, rather
than narrowly focusing on individual markets. International finance research is conducted by
large institutions such as the International Finance Corp. (IFC), and the National Bureau of
Economic Research (NBER). Furthermore, the U.S. Federal Reserve has a division dedicated to
analyzing policies germane to U.S. capital flow, external trade, and the development of global
markets.
The Bretton Woods system was created at the Bretton Woods conference in 1944, where the 40
participating countries agreed to establish a fixed exchange rate system. The collective goal of
this initiative was to standardize international monetary exchanges and policies in a broader
effort to create post-World War II stability. The Bretton Woods conference catalyzed the
development of international institutions that play a foundational role in the global economy.
These include the International Monetary Fund (IMF), a consortium of 189 countries dedicated
to creating global monetary cooperation, and the International Bank for Reconstruction and
Development, which later became known as the World Bank. International trade is arguably the
most important influencer of global prosperity and growth. However, there are worries related to
the fact the United States has shifted from being the largest international creditor to becoming the
world's largest international debtor, absorbing excess amounts of funding from organizations and
countries on a global basis. This may affect international finance in unforeseen ways.
Investment decision refers to the decisions that involve the investment of various resources of the
firm to gain the highest possible return on investment for their investors. An investment decision
is categorized as a long-term and short-term investment decision. Financial Management is
concerned with the management of the flow of funds and involves decisions related to the
acquisition and application of funds in long-term and short-term assets. It is concerned with two
aspects; they are procurement of funds as well as usage of finance. There are three major
decisions that every financial management takes Investment Decision, Financial Decision, and
Dividend Decision. A firm has to also keep in mind the scarcity of resources. It involves carrying
out financial decisions on a long-term basis. This type of investment is known as a Capital
Budgeting Decision.
There is a lack of in-depth study on the role of monetary policy in multinational investment
decision-making in Nepal so this study will contribute to developing the new knowledge by
fulfilling this research gap.

3. Research Objectives
Monetary policy plays a crucial role in shaping the investment environment in any country,
including Nepal. Multinational investment decision-making in Nepal is influenced by various
factors, and the monetary policy of the country is one of them. A stable and well-managed
monetary policy can create a favorable environment, attracting foreign investment and
contributing to the country's economic growth. On the other hand, inconsistent or poorly
managed monetary policies may deter multinational corporations from making long-term
investments in Nepal. Considering this fact, the general objective of this study is to explore the
role of Monetary Policy in multinational Investment Decision-making in Nepal.

4. Research Methodology
Research Methodology to be used for this present study is proposed as follows.

4.1 Research Design

This research will be based on the cross-sectional descriptive and explanatory research design.
Relevant data will be collected by literature review, Survey Questionnaires/interviews, and Case
studies. Finally, all information will be tabulated and statistically analyzed.

4.2 Population and Sampling

The study will be based on a purposive sampling technique to select the key informants to have
knowledge and experience study on the Impact of Monetary Policy in Multinational Financing
and Investment Decisions. The sample unit of the study will be an authorized person from the
concerned organization. Sample size will be calculated considering the standard sample
calculation formula then the final sample size will be decided based on the population size of the
study area.

4.3. Research Instruments

The study will collect both primary and secondary Data. An interview and Questionnaire Survey
will be adopted to collect the primary data and a document review will be carried out to collect
the secondary data.

4.4 Data Interpretations and Synthesis

The study will statistical software (Excel/SPSS) for the quantitative data analysis, as well as
qualitative software and process will be adopted for the qualitative data analysis. The
quantitative data will be presented in tabular form or graph then qualitative data will be
presented in narrative form. The result will be claimed based on the findings of both types of
data.

4.5 Workplan
The study is planned to be completed within the stipulated time by the University.
References

[1] . Remittance inflows have come to be a major factor in Nepalese monetary policy in present
times (Maskay et al., 2015).