Interbank Interest Rate Hits Rastra Bank's Limit after Four Months

 The interbank interest rate in Nepal, which had remained below the central bank's set limit for the past four months, has recently surged to reach the specified threshold. On Tuesday, the rate touched the limit set by Nepal Rastra Bank, indicating a shift in the monetary landscape.

In the current fiscal year's monetary policy, the central bank had initially aimed to keep the interbank interest rate above 4.5%. However, during the first-quarter review, this limit was adjusted to 3%. As of Tuesday, the interbank interest rate reached this revised limit.

The lower limit of the interest rate corridor, reflected in the deposit collection rate, currently stands at 3%, while the upper limit, represented by the bank rate, is set at 7%. Nepal Rastra Bank endeavors to maintain the interbank interest rate within this corridor, regulating liquidity in the market accordingly.

To align with its monetary policy objectives, the central bank has been consistently withdrawing liquidity from the market in recent months. Over the past one and a half months, Nepal Rastra Bank has withdrawn a substantial amount of 2 kharba 50 arba rupees. Despite these efforts, approximately 1 kharba in liquidity remains withdrawn from banks.

The interbank interest rate, which had fallen below 4.5% since Bhadra 27, experienced a notable increase on Tuesday, reaching the limit. This shift is attributed to the continuous withdrawal of liquidity by Nepal Rastra Bank.

While the interbank interest rate momentarily reached the target on Tuesday, sustaining the same limit remains challenging due to the surplus liquidity held by banks. The central bank withdrew 10 arba liquidity on Tuesday and plans to withdraw an additional 25 arba on Wednesday, contributing to the ongoing fluctuations in the interbank interest rate.

This development comes after a series of policy rate reductions in the first quarter review of the current fiscal year's monetary policy, responding to the consistent decline in interbank interest rates.

Despite the recent surge, the interbank interest rate is likely to remain dynamic as banks grapple with excess liquidity in the market.