Nepal's capital market has long been a mirror of the country's political economy, not just in how it performs, but in what it reveals about institutional character. For most of its post-liberalization life, the market reflected exactly what surrounded it: short-termism, rent-seeking, regulatory capture, and an almost chronic reluctance to modernize. That may now be changing. Whether it actually does depends on whether the Balen Shah government treats the capital market as the serious instrument of national development that it is, rather than simply another policy item to be managed.

Figure 1: NEPSE Index Trajectory — A Decade of Volatility

Source: NEPSE / Nepal Stock Exchange. FY2025 figure is estimated based on available data. The 2021 peak at 3,227 points followed by a sharp correction illustrates the market's structural volatility.

The RSP's landslide in the March 2026 elections, securing 182 of 275 parliamentary seats, was not merely a political verdict. It was a public declaration that the old framework of revolving coalitions and borrowed time had exhausted whatever patience remained. Balen Shah, who entered national politics after a genuinely consequential tenure as Kathmandu Mayor, arrived with a mandate that previous governments could only pretend to have. His government's 100-point reform agenda signals an ambition that, if carried through, could reconfigure the institutional architecture of Nepali governance, including its financial governance, in ways that would have seemed implausible just eighteen months ago.

The capital market sits at an interesting intersection in all of this. Nepal's stock exchange, NEPSE, remains the country's only trading venue, covering over 410 listed companies with a total market capitalization now exceeding NPR 442,000 crore. Those numbers sound substantial. They are not. The market remains overwhelmingly equity-dependent, retail-dominated, and prone to sharp sentiment-driven swings that have little to do with the underlying value of the companies being traded. Bond markets are thin to the point of being functionally irrelevant for capital formation. Derivative instruments, exchange-traded funds, and structured products barely exist. The free float on most listed securities remains dangerously low, which is to say that when sentiment turns, there is very little shock-absorption capacity in the system.

Figure 2: Market Capitalisation as % of GDP — Regional Comparison

Source: World Bank, national exchanges. Nepal's market cap at ~11% of GDP places it far behind regional peers. India exceeds 90%, and Malaysia's market cap surpasses GDP itself. The gap signals untapped domestic capital mobilization.

The reform proposals currently on the table are, taken individually, sensible. The push toward 100% book building for IPOs addresses a longstanding problem: that par-value-based pricing disconnected new issuances from any meaningful assessment of company fundamentals, creating artificial pricing distortions on the first day of trading. The demand to operationalize a Settlement Guarantee Fund and move away from close-out penalties reflects a real investor protection deficit that has deterred more sophisticated participation in the market. The call to allow NRN investors parity in tax treatment with resident Nepalis is, frankly, overdue. Nepal's diaspora represents a significant pool of capital that has been needlessly discouraged by regulatory friction and asymmetric tax burdens.

The proposal to mandate that NEPSE and SEBON restructure within fifteen days is more theatrical in its framing than its substance requires, but the underlying intent is correct. These institutions have operated as bureaucratic entities whose primary function often seemed to be the processing of paperwork rather than the supervision of market integrity. SEBON's enforcement capacity needs to be rebuilt, not just reorganized. Mandating property disclosures for institutional officials is a step in the right direction, though it will only mean something if it is followed by actual investigation when disclosures reveal what experience suggests they might.

What the reform agenda must be careful about is the gap between stated intent and structural risk. Two areas deserve particular scrutiny. The first is the push to allow banks and financial institutions easier entry and exit from the secondary equity market. In a market with Nepal's depth, or rather its lack of it, a major BFI exiting a sizable position during a period of market stress does not just create a price correction. It creates a systemic event. The Nepali market does not have the institutional depth to absorb large institutional sell-offs without significant dislocations. Liberalizing BFI participation without simultaneously deepening the market through new instruments and expanded institutional investor participation from entities like the Employees Provident Fund, the Citizens Investment Trust, and the Social Security Fund is a recipe for volatility, not stability.

Figure 3: Capital Gains Tax Revenue vs. NPL Ratio (FY2018–FY2024)

Source: ICAN, NRB financial stability reports. The CGT revenue spike in FY2022 reflects the bull market, while the subsequent collapse mirrors the index correction. The simultaneous rise in NPL ratio from ~2% to over 5% by FY2024 illustrates how banking stress and market weakness compound each other.

The second concern is around Capital Gains Tax clarity. Declaring CGT as the final tax on equity transactions would undoubtedly improve investor sentiment in the short term. Investors have been rattled for years by the ambiguity around whether CGT settlements might later be subject to income tax reassessment. Resolving that ambiguity is legitimate and valuable. However, the fiscal trade-off is real. In years when the market underperforms, transaction-based tax revenues collapse, as evidenced by the 71% decline in CGT collections during previous bearish periods. A government committed to genuine fiscal sustainability needs to think carefully about how much revenue volatility it is willing to absorb as a consequence of market-linked tax policy.

The RSP's manifesto commitments on economic governance are broader than capital markets alone. They speak to credit allocation reform, banking sector supervision, productive sector lending, and the resolution of the non-performing loan overhang that continues to weigh on the balance sheets of commercial banks. These are not peripheral issues to capital market development. A financial system in which credit is disproportionately channeled toward speculative real estate rather than toward agriculture, manufacturing, and energy is a system that produces a weak real sector, and a weak real sector produces companies with poor earnings quality, and poor earnings quality produces a stock market that is functionally a casino for information asymmetry rather than an instrument of wealth creation.

This is the deeper argument for reform, and it is the one that nationalist economics demands. Nepal's capital market should be a mechanism for mobilizing domestic savings toward productive national investment. It is not that today. The rural population has virtually no access to market instruments. Migrant workers who send remittances home, and who represent a substantial and economically motivated cohort of potential investors, have no practical gateway into the market. Financial literacy remains low enough that speculation dominates investment behavior, and speculation amplifies volatility rather than dampening it.

Figure 4: Reform Gap — Current State vs. Target (Indicative Score /10)

A qualitative assessment of Nepal's capital market across six reform dimensions. Scores are indicative, based on the reform committee findings and SEBON reports. The gap between current capacity and reform target is widest in Market Depth, Financial Inclusion, and Governance — the three areas where structural change matters most.

A government with a near-supermajority has something that previous governments in Nepal never had: the institutional authority to make uncomfortable changes without needing to negotiate them away in coalition corridors. The question is whether that authority will be directed at the structural problems or at the symptoms. Structural reform means building the legal architecture for a bond market, not just talking about it. It means genuine capacity-building at SEBON, not a reshuffle. It means a Market Stabilization Fund with real resources and clear operating rules. It means taking financial literacy seriously enough to embed it in educational curricula rather than running occasional investor awareness seminars that reach nobody who needs them.

Nepal has been here before, in smaller ways. Reports have been written. Committees have submitted recommendations. Workshops have been held. What has been missing is the political will to act on them, and the institutional capacity to follow through. The Balen government has been handed an extraordinary political window. If it uses it to transform how Nepal's financial sector operates, it will have done something genuinely historic. If it settles for a round of regulatory reshuffling and some well-publicized enforcement actions against a few visible targets, the market will briefly rally, confidence will briefly return, and the structural problems will quietly reassert themselves when the next political cycle begins.

The capital market alone does not determine Nepal's economic trajectory. But it is not separable from it either. Getting this right, really right, is one of the more consequential things the new government could do for the country.

Data Notes

Figure 1 — NEPSE index data compiled from NEPSE annual reports and SEBON publications. FY2025 is an estimate.
Figure 2 — World Bank Financial Development database and national exchange disclosures.
Figure 3 — CGT revenue data from IRD/ICAN reports; NPL ratio from NRB Financial Stability Reports.
Figure 4 — Author's qualitative assessment based on SEBON reform committee reports and comparative emerging market benchmarks.

Expressed opinion are personal.