Central bank to mop up Rs 8bn liquidity today

Kathmandu, June 19

Nepal Rastra Bank (NRB) mopped up Rs 7.1 billion liquidity from the market today and plans to mop up another Rs eight billion on Wednesday to bring the interbank rate within the stated interest rate corridor. The central bank today had issued deposit auction notice of Rs 10 billion at three per cent interest rate for two weeks, however, the banks and financial institutions have applied for only Rs 7.1 billion today, according to NRB.

The NRB has mopped up liquidity as the interbank rate has plunged below the lower bound of the interest rate corridor due to excess liquidity. The interbank rate stood at 2.97 per cent on Sunday. NRB has said that due to excess liquidity in market along with the release of funds from the government’s capital expenses the interbank rate has gone down, which is a natural phenomenon during the end of the fiscal year calendar.

Nara Bahadur Thapa, executive director of NRB, said that the central bank will repeatedly absorb excess liquidity from the market to keep the interbank rate within the stated interest rate corridor.

The three per cent interest rate is the lower bound, or floor, of the interest rate corridor for short-term instruments like interbank borrowing and treasury bills, among others. The Monetary Policy 2017-18 has envisioned to keep the short-term interest rate in between three per cent and seven per cent for the stability of interest rates. Three per cent is lower bound and seven per cent is upper bound of the interest rate corridor.

The central bank mops up liquidity when the interest rate drops below three per cent and injects liquidity when the interest rate increases above five per cent, to keep the interest rate stable.

The central bank has started implementing the interest rate corridor on short-term interest rates and plans to gradually enforce it for long-term interest rates like on deposits and lending.

“Once the short-term interest rate stabilises, we can expect the interest rate corridor to work on long-term interest rates like lending and deposits,” said Narayan Prasad Paudel, spokesperson for the central bank.

Banks can lend up to 80 per cent of the sum of their core capital and total deposits. From the remaining 20 per cent, they have to maintain six per cent as cash reserve ratio (CRR), around four to five per cent liquid cash in their vault and remaining 10 to 11 per cent can be invested in government securities.