Inflation in Nepal rises amid India’s price hike

The high inflationary pressure from neighboring India has led to a rise in food prices in Nepal. India’s inflation has reached 5.48 percent over the past four months, with vegetable prices remaining elevated since last month. The continuous price hikes in India over the past two months have also affected Nepal, contributing to an increase in inflation, according to Gunakar Bhatta, Executive Director of the Economic Research Department at Nepal Rastra Bank. 

Overall inflation has risen due to the surge in food prices. According to the central bank, the annual point-to-point consumer inflation rate for the current fiscal year, as of October, reached 5.6 percent, higher than the 5.38 percent recorded in the same month last year. Inflation for food and beverages stood at 9.1 percent, while non-food and services saw an inflation rate of 3.65 percent. In October of the previous year, food and beverage inflation was 5.98 percent, and non-food inflation was 4.99 percent. 

Subcategories within food and beverages experienced significant price increases. Vegetables saw inflation of 33.99 percent, lentils and pulses rose by 10.78 percent, food-related products increased by 10.15 percent, and ghee and oil prices climbed by 9.29 percent. However, the prices of spices, sugar and sugar products, and fish and meat decreased by 1.41 percent, 1.28 percent, and 0.02 percent, respectively. Bhatta pointed out that the overall price pressure in Nepal is primarily due to rising food prices in India, where food items are more expensive.

Nepal’s foreign exchange reserves have grown, as more foreign currency has been flowing into the country than leaving. As of October in the current fiscal year, foreign exchange reserves stood at Rs 2.05trn, compared to Rs 1.5trn during the same period last year. In US dollar terms, the reserves increased from $113m last year to $153m this year. Additionally, the current account balance has also risen, from Rs 97.1bn last year to Rs 143.42bn this year. Foreign direct investment has increased as well, with Rs 5.76bn flowing into Nepal compared to Rs 3.65bn last year.

Before the Covid-19 pandemic, economic activity in Nepal was robust, with growth surpassing seven percent. However, the economy has not yet returned to that level. Bhatta argues that with the increase in foreign exchange reserves, there is now a solid foundation to expand economic activities. While the external sector has strengthened over the past year and a half, domestic inflation remains high. He suggests that both the government and the private sector should focus on expanding economic activities, particularly in infrastructure development and construction projects. This expansion, combined with the management of surplus foreign exchange reserves and market liquidity, will help drive economic growth.