Nepal Rastra Bank Tightens Interest Rate Corridor in Monetary Policy Review

Kathmandu. Nepal Rastra Bank has stated that it is further narrowing the interest rate corridor in its annual review of the monetary policy for the fiscal year 2082/83. The central bank aims to reduce the gap between the lower and upper limits of the interest rate corridor and keep the policy rate within the corridor.

In the monetary policy for the current fiscal year, the interest rate on the upper limit, which is the standing liquidity facility, was set at 6.0 percent, the interest rate on the lower limit, the standing deposit facility, was set at 2.75 percent, and the policy rate was set at 4.50 percent. In the first review, the upper limit and the policy rate were adjusted to 5.75 percent and 4.25 percent respectively. While the weighted average interbank rate was set as the operational target to be close to the policy rate, the weighted average interbank rate in Baishakh 2083 was 2.75 percent.

As per the monetary policy, open market operations based on rules have been conducted for liquidity management. In addition to regular monetary instruments, Nepal Rastra Bank bonds have also been issued to manage the structural liquidity in the banking system.

In the first ten months of the fiscal year 2082/83, liquidity has been absorbed 71 times through deposit collection auctions for periods ranging from 4 to 175 days, 117 times through the standing deposit facility, and 9 times through 1-year Nepal Rastra Bank bonds. In Baishakh 2083, the outstanding amount of liquidity absorbed through deposit collection auctions was Rs. 716 billion 70 crore, Rs. 111 billion 90 crore through the standing deposit facility, and Rs. 200 billion through Nepal Rastra Bank bonds. During the same period, liquidity of Rs. 946 billion 26 crore has been injected into the foreign exchange market through net purchase of US dollars.

Due to excess liquidity in the financial system, short-term interest rates have remained close to the lower limit of the interest rate corridor. In Baishakh 2083, the weighted average interbank rate of banks and financial institutions was 2.75 percent, and the weighted average interest rate of 91-day treasury bills was 2.63 percent.

As short-term interest rates are low and there is excess liquidity, deposit and loan interest rates have further decreased. In Baishakh 2083, the average deposit interest rate of commercial banks was 3.35 percent, development banks 3.70 percent, and finance companies 4.59 percent. During the same period, the weighted average loan interest rate of commercial banks was 6.73 percent, development banks 7.87 percent, and finance companies 9.14 percent.