Kathmandu. Although the Nepal Rastra Bank has pulled billions of rupees from the market to manage the excess liquidity in the banking system, the efforts to bring the interest rate around the policy rate have not been effective. Due to the accumulation of excess liquidity in the system, the short-term interest rate has been concentrated on the lower limit of the interest rate corridor. The direct impact of which is being felt by the depositors. <\/p>\n
The central bank aims to keep the interest rate around the policy rate through the monetary policy. Currently, the policy rate is 4.25 percent. The upper limit of the interest rate corridor is 5.75 percent and the lower limit is 2.75 percent. However, the interest rate in the market has come down below the policy rate and has reached the floor rate of the corridor. <\/p>\n
Due to the weak demand for loans in the banking system, the money from deposits and other sources has not been invested. Since then, the banks and financial institutions have been piling up surplus money. To manage this amount, the Rastra Bank is continuously exploiting liquidity through various monetary instruments. <\/p>\n
The central bank has raised bonds worth Rs 400 billion for a period of 1 year. Similarly, it is absorbing liquidity through Permanent Deposit Facility (SDF) of Rs 30 billion and deposit collection instruments of about Rs 7.5 trillion. Even after drawing such a large amount of liquidity, the interest rate of the market has not been able to move towards the policy rate. <\/p>\n
Instead, banks have started competing at low interest rates to park money in the Rastra Bank. In the bidding held through the deposit collection instrument on September 12, 14 and 16, the average interest rate was fixed at 2.73, 2.72 percent and 2.72 percent respectively. That is, the banks are ready to put money in the Rastra Bank at an interest rate less than the lower limit of 2.75 percent of the interest rate corridor. <\/p>\n
This shows that the current problem is not limited to excess liquidity. Although the central bank is exploiting liquidity, its impact has not been seen in the structure of the interest rate as expected. While the policy rate is at 4.25 percent, the short-term interest rate of the market is around 2.7 percent. This shows that the gap between the monetary policy signals and the real state of the market has increased. <\/p>\n
The permanent deposit facility provided by the Rastra Bank to manage more liquidity has become a means of some relief for the banks. However, it has not been able to manage all the excess money in the system. Banks and financial institutions can park up to 88 percent of the total amount collected from depositors in the Rastra Bank, but the remaining 12 percent has to be kept as a free fund. <\/p>\n
According to the banking sector, the facility to park money in the Rastra Bank has helped to prevent the interest rate from going down further to some extent. However, the banks still have surplus money. When banking transactions are closed on Saturdays and Sundays and public holidays, the excess money in the system cannot be parked in the Rastra Bank, so the burden of it is shifted to the next day. <\/p>\n
On the other hand, the interest rate on Treasury bills has come down to an average of 1-1.5 per cent. Even in deposit collection instruments, banks are bidding up to 2.60 per cent, 2.65 per cent and 2.70 per cent. This shows how deep the pressure of excess liquidity in the banking system is. <\/p>\n
However, the biggest impact has been on the depositors. At present, the average interest rate of deposits is 3.15 percent and the average interest rate of fixed deposits is about 4.5 percent. Meanwhile, the inflation rate has reached 5.96 percent. The interest rate on ordinary deposits is about 2.8 percentage points lower than inflation. <\/p>\n
This means that the interest earned by keeping money in the bank has not been able to protect the real value of the money. Even though the interest rate of fixed deposits is comparatively high, it has not been able to beat inflation. That is, the savers are getting interest by keeping money in the bank, but their purchasing power is decreasing in the real sense. <\/p>\n
When the interest rate is low, the borrower gets the immediate benefit of it. When the interest rate of the loan is reduced, the cost of business and investment is reduced. However, if the interest rate is too low for a long time, there is a risk that the returns of the savers will decrease and the attraction of saving in the bank will also be weakened. <\/p>\n
Therefore, the challenge for the central bank now is not only to draw more liquidity but also how to show its impact on the interest rate. If there is no effective coordination between the policy rate, the interest rate corridor and the liquidity exploitation tool, the signal that the policy rate gives to the market may be weak.<\/p>\n","protected":false},"excerpt":{"rendered":"
Kathmandu. Although the Nepal Rastra Bank has pulled billions of rupees from the market to manage the excess liquidity in the banking system, the efforts to bring the interest rate around the policy rate have not been effective. Due to the accumulation of excess liquidity in the system, the short-term interest rate has been concentrated […]<\/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-318997","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\/318997","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=318997"}],"version-history":[{"count":1,"href":"https:\/\/insurancekhabar.com\/ikbrapi\/wp\/v2\/posts\/318997\/revisions"}],"predecessor-version":[{"id":318998,"href":"https:\/\/insurancekhabar.com\/ikbrapi\/wp\/v2\/posts\/318997\/revisions\/318998"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/insurancekhabar.com\/ikbrapi\/wp\/v2\/media\/229318"}],"wp:attachment":[{"href":"https:\/\/insurancekhabar.com\/ikbrapi\/wp\/v2\/media?parent=318997"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/insurancekhabar.com\/ikbrapi\/wp\/v2\/categories?post=318997"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/insurancekhabar.com\/ikbrapi\/wp\/v2\/tags?post=318997"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}