Rs 85 billion mopped up to manage liquidity

Nepal Rastra Bank (NRB) mopped up Rs 85.05 billion of liquidity from bank and financial institutions (BFIs) in the first two months of the current Fiscal Year 2016/17. The central bank had absorbed Rs 87.65 billion of liquidity from the banking system in the same period of 2015/16. As the NRB is continuously mopping up liquidity, the BFIs are now in a comfortable position. The NRB has been employing various instruments as part of open market operation to manage liquidity. Reverse repo, deposit collection and outright sale auction are the major instruments that the central bank has been using to mop up liquidity from the banking industry. In the review period, the NRB mopped up Rs 31.5 billion through deposit auction. While it used to hold deposits of the BFIs through auction for until 90 days until last fiscal year, the NRB has introduced a 14-day deposit collection auction under interest rates corridor system recently. Out of Rs 31.5 billion, Rs 26.45 billion was collected by the central bank through 14-day auction. Similarly, the NRB mopped up Rs 53.55 billion through reverse repo. The central bank also injected Rs 10 million into the banking system through repo auction. Bankers say that the central bank's regular open market operation has also contributed to an extent for the gradual tightening of their liquidity position. While credit flow is picking up in recent days with the economic activities in the country gaining momentum, growth in deposits have been hit by the decline in the remittances inflow and failure of the government to boost its capital spending. Slowdown in the deposit growth rate, surplus in government treasury, and rise in lending and liquid funds of the BFIs stuck in the central bank's vault have led to the rise in interest rates in recent months, according to bankers. BFIs are now publishing new interest rates and most of them have raised their interest rates by 1 to 3 percentage points. They are now trying to lure depositors with interest rate of up to 6.5 percent on one-year fixed deposit compared to 4 to 5 percent that they used to offer in the corresponding period of the last fiscal year. Rates on treasury bills, interbank lending rates, reverse repo, deposit auction and other instruments have also gone up. The NRB officials say that that corridor system is now showing its effect. Source: republica