Dr. Hom Nath Gaire 1. Introduction Interest rate volatility has been a recurring challenge in Nepal’s banking system, often resulting in uncertainty for borrowers and investors. Sharp fluctuations in deposit and lending rates—driven by shifts in liquidity, credit demand, and monetary policy—can undermine business planning and delay investment decisions. While market-based interest rate determination is essential for efficient capital allocation, excessive volatility erodes confidence in the investment climate. To address this, an interest rate corridor tailored to Nepal’s context is proposed. This mechanism aims to stabilize lending rates without undermining the role of market forces, thereby improving predictability for investors and encouraging credit flow to productive sectors. 2. Conceptual Framework The proposed corridor will operate within each individual bank , using two market-linked boundaries: Lower Bound (Base Rate) : The base rate will be the weighted...