Kathmandu. Nepal Rastra Bank (NRB) is preparing to reduce the existing gap in the interest rate corridor. The central bank is looking to address the sharp volatility of interest rates that has persisted for years. <\/p>\n
The central bank has set a strategy to significantly reduce the existing gap in the interest rate corridor to control the abnormal fluctuations in the rate of interbank transactions between banks and financial institutions. Bank officials say that the main objective of this move is to maintain the interest rate in the market around the policy rate set by the Nepal Rastra Bank and to ensure long-term predictability in the financial sector. <\/p>\n
Currently, the floor rate is 5.75 percent and the floor rate is 2.75 percent. The gap between the two thresholds now stands at 3 percentage points, which economists and central bank officials consider to be much wider. Due to this 3 percent gap, when there is more liquidity in the market, the interbank rate suddenly falls to the lower limit and when there is a scarcity, it goes up to the upper boundary. To break this cycle, the central bank is now preparing to narrow the gap of 3 percent. <\/p>\n
In the last 6 years, Nepal’s inter-bank interest rate has fluctuated drastically. At one point, the rate has fallen to a minimum of 0.18 per cent due to a shortage of money in the system, and has risen to 8.5 per cent when there is a liquidity crunch. Such volatility affects the base rate of banks. This will ultimately have a direct impact on ordinary borrowers and depositors. When the interbank rate is volatile, banks are forced to revise the interest rate on loans and the rate of deposits. This leads to confusion in the market. <\/p>\n
In international practice, the difference in interest rate corridors is much smaller in developed and stable economies. In neighbouring India, the gap was just 0.50 percentage points, while in the United States, it was narrowed to 0.25 percentage points. In other South Asian countries, Sri Lanka has a gap of 1 per cent and Pakistan has a gap of around 2 per cent. According to the central bank’s analysis, the difference of 3 percent in Nepal is weakening the effectiveness of the monetary policy. The narrower the corridor, the more regulated and close the market interest rate will be. <\/p>\n
One of the main benefits of narrowing the interest rate corridor is the improvement in the investment climate. Stability of interest rates is considered to be the backbone especially for sectors that require long-term investment, such as hydropower, manufacturing industries and infrastructure. If a businessman borrows today and can’t predict where the interest rate will go tomorrow, he doesn’t want to take a big risk. As the corridor gap decreases, the risk of interest rates for investors is reduced as the abnormal rise or fall in interest rates will be stopped. This makes it easier for businesses to plan for the future and make investment decisions. <\/p>\n
However, experts say that implementing this policy can be somewhat challenging for the central bank. Narrowing the corridor means that even if there is a little excess liquidity in the market, the central bank has to withdraw money immediately and send it immediately when there is a shortage. In this process, the central bank will have to make some adjustments on the cost of interest. However, the NRB seems to have come to the conclusion that it is appropriate to bear this cost for the stability of the overall economy and the credibility of the monetary policy. <\/p>\n
The central bank has already cut the ceiling rate by 0.75 percentage points and the floor rate by 0.25 percentage points. Bankers say the new move is expected to not only reduce rates but also serve as a milestone in keeping rates stable.<\/p>\n","protected":false},"excerpt":{"rendered":"
Kathmandu. Nepal Rastra Bank (NRB) is preparing to reduce the existing gap in the interest rate corridor. The central bank is looking to address the sharp volatility of interest rates that has persisted for years. The central bank has set a strategy to significantly reduce the existing gap in the interest rate corridor to control […]<\/p>\n","protected":false},"author":16,"featured_media":229318,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[45117,45031,45159],"tags":[],"class_list":["post-304782","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-bank-finance-en","category-banner-news-en","category-news-en"],"acf":[],"_links":{"self":[{"href":"https:\/\/insurancekhabar.com\/ikbrapi\/wp\/v2\/posts\/304782","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/insurancekhabar.com\/ikbrapi\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/insurancekhabar.com\/ikbrapi\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/insurancekhabar.com\/ikbrapi\/wp\/v2\/users\/16"}],"replies":[{"embeddable":true,"href":"https:\/\/insurancekhabar.com\/ikbrapi\/wp\/v2\/comments?post=304782"}],"version-history":[{"count":1,"href":"https:\/\/insurancekhabar.com\/ikbrapi\/wp\/v2\/posts\/304782\/revisions"}],"predecessor-version":[{"id":304783,"href":"https:\/\/insurancekhabar.com\/ikbrapi\/wp\/v2\/posts\/304782\/revisions\/304783"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/insurancekhabar.com\/ikbrapi\/wp\/v2\/media\/229318"}],"wp:attachment":[{"href":"https:\/\/insurancekhabar.com\/ikbrapi\/wp\/v2\/media?parent=304782"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/insurancekhabar.com\/ikbrapi\/wp\/v2\/categories?post=304782"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/insurancekhabar.com\/ikbrapi\/wp\/v2\/tags?post=304782"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}