Kathmandu, September 11
With excess liquidity building up in the financial system, Rs 1.35 trillion has piled up at Nepal Rastra Bank. The surplus liquidity has accumulated at the central bank due to continuously rising deposits and falling demand for credit in the financial system.
When there is excess liquidity in the financial system, short-term interest rates, that is, interbank interest rates, fall. The central bank has adopted a policy of not letting the interbank rate fall below 2.75 percent. To manage this rate, the central bank has been both withdrawing and injecting liquidity as needed. However, in recent times, only withdrawal has been taking place because of the persistent surplus.
The central bank has been mopping up the excess liquidity in the financial system through deposit collection instruments, bonds, and the standing deposit facility. On Friday too, the bank moved to withdraw liquidity through a two-month deposit collection instrument worth Rs 7.5 billion.
The central bank had earlier issued a deposit collection instrument worth Rs 3.5 billion on Monday as well. The continuous improvement in remittance inflows has also contributed to the rise in liquidity in the financial system. In addition, sluggish demand for credit in the financial sector, caused by the slow economy, has further helped liquidity build up.
According to the central bank, as of Thursday, the financial system held about Rs 40 billion in liquidity. However, since money that banks and financial institutions had parked at the central bank through the standing deposit facility and deposit collection instruments was maturing, the deposit collection instrument was issued to draw it back in. Banks and financial institutions use the standing deposit facility to park excess liquidity at the central bank for the short term.
For the deposit collection instrument, the central bank prioritises allocation to banks and financial institutions that ask for the lowest interest rate.
When the central bank injects liquidity into the financial system, it charges interest at the bank rate, the upper limit of the interest rate corridor, and when it withdraws liquidity, it pays interest at the standing deposit facility rate, the corridor’s lower limit. The bank rate currently stands at 5.75 percent and the standing deposit facility rate at 2.75 percent.
