Illusion of Prosperity
The Resilient but Fragile Rise of Nepal's Stock Market
As 2025 draws to a close, the Nepal Stock Exchange (NEPSE) index remains above 2,600, with market capitalization reaching into the trillions of rupees. This growth appears to signal financial modernization, transforming the stock market from a domain for elite investors into a mass movement driven by digital access. Today, over 6.3 million trading accounts exist, a dramatic increase from just 740,000 in early 2020. However, this expansion masks deeper structural vulnerabilities.
The current market trend is not an indicator of healthy economic growth but rather a speculative bubble fueled by an overwhelming influx of liquidity. Beneath the surface, the market suffers from information asymmetry, regulatory capture, and signs of distress in the real economy. Rather than fostering economic development, the market functions as a mechanism for wealth transfer, siphoning resources from the middle class into a network of entrenched interests.
The Micro Disconnect: A Decoupled Market
In a well-functioning economy, stock market performance aligns with corporate earnings and overall productivity. In Nepal, however, this correlation has vanished. Despite fears of a credit crunch, the market is characterized by an excess of liquidity that is expected to persist for at least the next three years. With limited options for industrial investment and a stagnant real estate sector, this surplus capital flows into the secondary market.
While the stock market has seen a surge in value, the banking sector, which serves as the primary engine of the economy, is struggling. Recent data shows that Non-Performing Loans (NPLs) in commercial banks have risen to 4.86 percent. In a rational market, this would lead to a correction in bank valuations. Instead, these institutions are being propped up by the very liquidity they cannot deploy into the productive sector.
This disconnect raises concerns about a potential Minsky Moment—a sudden collapse triggered not by a lack of cash, but by a reassessment of risk. When the illusion fades and the true quality of assets is revealed, the abundance of liquidity may only amplify the eventual crash.
Irrational Exuberance: The Legacy of the Pandemic
To understand the current state of the market, one must revisit the period during the pandemic. Despite the paralysis of the real economy, NEPSE reached a record high of over 3,200 points. This was a textbook example of speculative mania during economic shocks. With physical businesses closed and leisure time abundant, many Nepalis turned to digital trading as a pastime. Excess liquidity, generated by low demand for industrial loans and high remittance inflows, flowed directly into the stock market.
Most retail investors today entered the market during this period, driven by herd mentality. They now cling to the hope that the market will return to those heights, ignoring the fact that those gains were disconnected from reality. This behavior reflects anchoring bias, where investors fixate on past peaks as the true value of the market.
The Market for Lemons: Information Asymmetry
George Akerlof’s theory of the "Market for Lemons" highlights how information imbalances can lead to the dominance of poor-quality assets. In Nepal, the Initial Public Offering (IPO) has shifted from a tool for capital formation to an exit strategy for promoters. Recent trends, such as premium share issuances, reflect a dangerous precedent. Valuation models are often manipulated to justify high entry prices, based on unrealistic projections.
The hydropower sector exemplifies this imbalance. Promoters are aware of the 30-year expiration of project licenses, yet they sell equity as if it were perpetual. Retail investors are essentially providing liquidity for institutional lemons, without adequate oversight.
Failing Immune System: Regulatory Capture
The Securities Board of Nepal, the regulator tasked with maintaining market integrity, has failed to act as an impartial arbiter. Signs of regulatory capture are evident, with the board increasingly serving the interests of powerful actors rather than protecting the public. Its inability to implement key reforms, such as classifying risky firms, indicates a lack of political will to safeguard investors.
This institutional weakness is compounded by coordination failures among market participants. Instead of functioning as a cohesive ecosystem, Nepal’s capital market governance resembles a collection of silos, each deflecting responsibility and failing to build systemic confidence.
Distributional Crisis: The Middle Class at Risk
Driven by fear of missing out and a lack of alternatives in a stagnant economy, retail investors are entering the market at peak valuations. The presence of excess liquidity creates a false sense of security, allowing the bubble to grow further. However, when the inevitable correction occurs—whether through regulatory action, a re-rating of risk, or the natural deflation of speculation—the consequences could be catastrophic.
Household savings, already under pressure, could suffer significant losses, leading to long-term damage to consumer sentiment and national savings. This distributional crisis underscores the urgent need for reform.
A Fork in the Road
Nepal’s capital market stands at a critical juncture. The enthusiasm of millions of investors represents a valuable resource that could fuel national development. However, the current bull market, sustained by stagnant capital and a captured regulator, is a dangerous mirage. What is needed is a market that rewards enterprise and innovation, not extraction. Without fundamental changes, the system risks becoming a gambling house where the odds are stacked against the very people it claims to empower.
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