'Controlled' financial regime makes Nepal immune from Fed's possible rate hike

While the stock markets in the Asia have ended on the red zone in the run-up to the decision, bankers and analysts say that Nepal do not have reasons to worry about any major volatility in the banking and financial system. They, however, say that the direct repercussion of the Fed rate hike will be on the foreign exchange system. The domestic currency is losing its value vis-à-vis US dollar in recent days which the financial experts attribute to the imminent benchmark rate rise by the Fed this week. The value of the US Dollar compared to Nepali rupee, which was on a rising trend in the run up to the earlier Fed meeting in mid-September, started declining until October 14. The greenback strengthened by 3.3 percent in the last two months alone. “Since we have a controlled currency regime, the possible rate rise will have a little implication in our country's financial and banking system,” said Bhisma Raj Dhungana, an executive director of Nepal Rastra Bank (NRB), who also heads the Foreign Exchange Department, said. “US dollar is appreciating in the last few days amid anticipation of rate rise by the Fed. If the Fed braces for benchmark rate rise, the US dollar is going to be stronger in the days to come. And we know appreciation of US dollar comes up with both pros and cons for Nepal,” he added. The appreciation of US currency gives incentive to exporters as Nepali goods become cheaper in the international market while it also boosts remittance inflows as migrant workers get encouraged to send their hard-earned foreign currency that fetches relatively higher domestic currency to their recipient families, according to experts. They also say that weaker domestic currency encourages more tourists to visit Nepal and spend more money. However, the stronger dollar will increase the liability of the country, particularly the debt and other payments to be made in US dollar. It also makes imports expensive, experts say. Unlike other emerging markets, including India, Nepal is not going to face any volatility in the capital market from the rate rise, according to capital market analysts.  According to international news media, stock markets in Asia have ended in the red zone in the run-up to the decision as investors and policymakers worry that equity and stock market investors will flee from the market, expecting a better return in the US following the benchmark rate rise. “The impact of any rise will be nil in the Nepali stock market which do not allow any foreign investment,” Praveen Raman Parajuli, president of Merchant Bankers' Association of Nepal, said. “Except any indirect impact from the policy shift, the stock market is immune from the possible Fed rate hike.”