Nepal, April 21 -- Nepal does not truly run its own monetary policy. A small, import-dependent economy that needed stability, credibility and a simple nominal anchor, it adopted a system that effectively outsourced monetary discipline to the Reserve Bank of India. At a time of institutional fragility, the logic was clear.

In theory, a central bank steers the economy through interest rates, liquidity management and the exchange rate. But Nepal's framework is constrained by the 'Impossible Trinity': It is not possible to simultaneously maintain a fixed exchange rate, allow capital mobility and retain an independent monetary policy. Nepal has effectively chosen exchange rate stability and financial openness with India, leaving little room f...