Nepal embarked upon a programme of financial development, including interest rate liberalisation and reform in 1974. The aims were explicitly to increase domestic saving, investment and the efficiency of investment. This paper analyses the effects of the interest rate reform. Short-run effects have included a change in the composition of money, a substantial fall in velocity of circulation and capital inflow from India. The overall effect has been mildly expansionary. However, saving and investment have not responded. Other government policies strongly deter investment. Yet, a buoyant demand for investible funds is a prerequisite for successful interest rate reform. The necessity of simultaneous liberalisation and reform of government taxation, price, foreign trade and finance policies to raise the rate of economic growth is borne out in the case of Nepal.