No IRC before interbank rate reaches 3 per cent

Kathmandu, Oct. 28: The Nepal Rastra Bank (NRB) has said that it would not implement the interest rate corridor (IRC) until the inter-bank rate reaches to 3 per cent.

Executive Director of the NRB Nara Bahadur Thapa said that the central monetary authority would use financial instruments to mop up the liquidity from the market to push the interbank rate up and implement the interest rate corridor.

“Our current focus is to raise the interbank rate to 3 per cent. The central bank has mopped up Rs. 57 billion in the first quarter of the current fiscal year 2017/18, and additional Rs. 40 billion will be pulled from the banks and financial institutions (BFIs) within a couple of months,” he said.

As per Thapa, the lower interbank rate would promote interest rate arbitrage, whereby the BFIs might involve in capitalising on the interest rate. 

But, the central bank couldn’t implement the IRC, even after the conclusion of the first quarter of the current fiscal.

The NRB is still developing the procedure for the corridor implementation.

According to Thapa, the details and designs for the full implementation of the new system are being developed and a team of experts is studying the practices from other countries so as to incorporate the good practices from the international market.

He also claimed that the NRB was in ‘wait and see’ situation following mobilisation of Rs. 57 billion internal loan in the first quarter of this fiscal.

The budget of this year aims at raising Rs. 145 billion internal loan, so the NRB and the Ministry of Finance were busy in preparing Issue Calendar and Auction Calendar, and mobilising loan.

“We were studying the impact of the loan mobilisation in the market. It is very important to stabilize the market. The NRB didn’t want to use multiple instruments at the same time as it might have created the liquidity crisis,” he said.

Furthermore, the financial sector regulator has kept itself ready to cooperate with the government in raising the internal loan that the latter might needed to manage expenditure after sending Rs. 75 billion to the local bodies.

The central government is facing about Rs. 38 billion budget deficit in the first quarter of this fiscal year.

Aiming at reducing the interest rate volatility, the NRB had implemented the interest rate corridor since the FY 2016/17 with 7 per cent upper ceiling, and through the Monetary Policy 2017/18, it had announced to settle the interest rate at minimum 3 per cent and maximum 7 per cent.

Thapa remarked that the market rate should be around 5 per cent.

According to the Monetary Policy, the provision of taking standing liquidity facility (SLF) as an upper bound of IRC is continued, and a provision of taking two weeks’ repo rate as a policy rate has been fixed at 5 per cent, a continuation of the previous provision.

“A provision of taking two weeks’ deposit collection rate as a lower bound of the corridor has been kept unchanged. However, such deposit collection rate has been fixed at 3 per cent. It is expected that this revision in interest corridor arrangement will help in minimizing interest rate volatility,” reads the policy.

The central bank has been saying that to manage liquidity, control market fluctuation and dynamic stabilization of the market, interest rate corridor is needed.