Nepal Rastra Bank — the central regulatory and monetary authority — will issue repurchase agreement (repo) of Rs 20 billion with two-week maturity period. NRB is going to issue repo as the banking sector is oriented towards liquidity crunch.
Interbank transactions have been limited as each bank is in a tight position due to scarcity of fresh deposits. The central bank decided to issue repo as the interest rate on interbank transactions has continuously overshot five per cent, as per central bank officials.
According to The Himalayan Times, the central bank has executed the interest rate corridor to keep short-term interest rate on the right track. In the corridor, three per cent is lower bound and seven per cent is the 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.
This is aimed at keeping the interest rate stable.
Short-term instruments include interbank borrowing and treasury bills. If the interest rate overshoots the upper limit or plunges below the lower bound, it is known as ‘interest rate crash’. The Monetary Policy 2017-18 has envisioned keeping the short-term interest rate between three and seven per cent for the stability of interest rates.
However, bankers have said that it will facilitate those banks that are borrowing from other banks. “The move will not help manage the credit to core capital plus deposit ratio and this will not address the credit crunch,” claimed Janak Sharma Poudyal, CEO of Global IME 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, around four to five per cent liquid cash in their vault and remaining 10 to 11 per cent can be invested in government securities, as per the central bank rules.