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R&D Report

Inflation

According to the latest macroeconomic report from Nepal Rastra Bank (NRB), the

year-on-year (y-o-y) CPI rose to 14.1 % in mid Dec 2008 from 5.7 percent in the

previous year. However, after five months of continuous price increment (See Figure

1), the y-o-y inflation figure has come down from 14.5 % in mid-November to 14.1 %

in mid-December 2008. The year-end annual report from the NRB shows that the

average annual consumer inflation was 7.7 percent in 2007/2008. Rising inflation,

according to the NRB report, has been driven primarily by significant rise in food and

beverages (17.2 percent) as well as non food and services (10.8 percent) group.

Analysts ------------------------------------

Shivanth B. Pande’

Economist & Financial Analyst

Research Head

Shivanth@nibl.com.np

Santosh Pokharel

Economist & Financial Analyst

Research Officer

santoshpk@nibl.com.np

Nischal Bajrachyara

Research Fellow

nischal@nibl.com.np

Kanchan Pandey

Research Fellow

kanchan@nibl.com.np

Upasana Rana

Research Fellow

upasana@nibl.com.np

Sharad Ghimire

Research Fellow

sharad@nibl.com.np

Summary:

• The Year-on-Year inflation rate as of mid-

December 2008 according to Nepal Rastra

Bank‘s (NRB) latest macroeconomic report is

14.1%.

• Wholesale Price Index (WPI) based inflation in

India as of Jan 24th

2009 is 5.07 %

• Asian Development Bank (ADB) has projected

economic growth rate of 3.5% for the current

fiscal year

• The NPR and INR have strengthened against the

USD. However the Forex market is still volatile

due to global economic uncertainty.

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Figure 1: The Year-on Year (y-o-y) inflation figure (Source: NRB)

While prices in Nepal have been skyrocketing, inflation in India has been easing

recently. The Wholesale Price Index (WPI) based inflation rate has come down to

5.07% for the week ending on Jan 24th from 5.64% the week earlier. After reaching

double digit numbers in mid-2008, the WPI based Indian inflation figures have been

coming down gradually during last few months. Economists expect the inflation rate

in India to go down to 3 percent by March.

Economic Growth

According to the recent Asian Development Bank (ADB) analysis, Nepal’s economy

is projected to have a 3.5% economic growth in the current fiscal year. During its

annual budget, the government of Nepal has targeted 7% economic growth for the

current fiscal year. According to the ADB outlook for Nepal 2008, the Nepal’s

economy is projected to grow at 4.3 % in 2009.

Foreign Exchange

NPR-USD

Due to the appreciation of the INR against the USD, the NPR has strengthened vis-à-

vis USD during the past week (See figure 2).

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Figure 2: USD-INR exchange rate for Feb 1 to Feb 6 (Source: NRB)

INR-USD

The INR-USD has been very volatile of late (See figure 3). The recent volatility in

the exchange rate can attributed to the current global economic distress and the

massive outflow of foreign funds from the Indian equity market. After appreciating

against the USD during much of 2006 and 2007 (See figure 4), the INR started losing

its value against the greenback as foreign institutional investors (FII) started

liquidating their positions in the Indian equity market. Foreign institutional investor

(FII) withdrew more than 13.5 billion USD from the Indian equity market in 2008.

The outflow of funds continues in 2009 with FII taking home USD 1 billion so far in

2009.

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Figure 3: INR-USD exchange rate from between Sept 08 to Jan 09

Figure 4: INR-USD exchange rate from 2004