Respite likely from negative interest rates

Depositors are likely to get respite from negative real interest rates as inflation is moderating and banks are starting to offer higher interest as they have been coming under liquidity pressure. According to a Nepal Rastra Bank (NRB) report on the current macroeconomic situation, inflation had eased to 8.6 percent as of the end of the first month of this fiscal year from 10.6 percent at the end of the last fiscal year. After having to be satisfied with paltry interest rates on savings for many years, depositors will be happy to know that banks have jacked up the interest rate on fixed deposits to around 7 percent, up 1 percentage point from last month. This shows that the negative real interest rate on depositors’ hard earned money has been eliminated to an extent, and they are likely to enjoy a positive real interest rate in the coming days. Bankers have admitted that they are currently under significant liquidity pressure and they have been forced to hike the rate on deposits. “Rates on deposits have already gone up and are likely to go further,” said Sashin Joshi, CEO of Nabil Bank. “One of the major reasons behind the liquidity pressure is the mandatory provision of maintaining 70 percent of the cash reserve ratio (CRR) on a daily basis introduced by NRB through this year’s monetary policy.” The CRR is a specified minimum fraction of the total deposits of customers which commercial banks have to hold as reserves with the central bank. Commercial banks have to maintain 6 percent of their total deposits as CRR at NRB. Earlier, commercial banks had to maintain the required CRR by the end of the week. Due to this reason, banks have to keep extra liquidity with themselves and it has helped in pushing up the interbank rate. The rise in interbank rates is being reflected on deposit rates. The introduction of an interest rate corridor by NRB is another reason behind the surge in interbank rates. “After the introduction of the interest rate corridor, the interbank rate went up to around 3 percent from 0.5 percent,” said Joshi. NRB introduced the corridor on August 10 to bring short-term market rates within a band and reduce interest rate volatility. According to Bhuvan Dahal, CEO of Sanima Bank, another reason behind the tight liquidity is a surge in lending by banks. “The growth in lending was greater than the growth in deposits,” said Dahal. “Lending by commercial banks surged significantly after the trade embargo by India was lifted.” Credit demand remained pretty low for most of the last fiscal year due to the devastating earthquake and trade embargo imposed by India. However, after the embargo was lifted, economic activities grew with a jump in imports and increase in reconstruction activities. Dahal said that hopes of positive real interest rates on deposits are far-fetched as a rise in lending rates will increase the cost of goods and services and fuel inflation. “However, negative real interest rates will be eliminated to a significant extent,” he added. Source: ekantipur