The proportion of domestic borrowing has been increasing in comparison to foreign borrowing in fiscal deficits in Nepal. This paper investigates the impact of domestic borrowing on private investment, interest rate, commercial banks loan to private sector and economic growth in Nepal. The study analyses the time series annual data from 1975 to 2011. The long run and short run relationships are established by using Autoregressive Distributed Lag (ARDL) and error correction models. The empirical results show that domestic borrowing has positive and significant impact on private investment and economic growth rate in long run and short run. Similarly, it has negative relationship with lending interest rate and no effect on the commercial banks loan to private sector in Nepal. The overall results empirically verify that the effect of domestic borrowing on private investment and economic growth rate is positive and confirms the Crowding-in effect as described by Keynesians in the case of Nepalese economy. Nepal, as being a developing country needs huge government fund for economic development. Government of Nepal can further utilize the domestic loan for government budget deficit financing.