Mid-term review of monetary policy next week

Liquidity surplus grappling banking system on agenda

KATHMANDU, Feb 26: Nepal Rastra Bank (NRB) is set to hold its mid-term review of its monetary policy for Fiscal Year 2015/16 next week with a liquidity surplus in the banking system being one of its main concerns.

The central bank has been mopping up liquidity from the market through short- and medium-term monetary instruments, but its efforts have not been able to fully resolve the problem.

An executive director at NRB told Republica that the mid-term review of the monetary policy will try to address the problem. The executive director, however, did not disclose the measures that the central bank will mull introducing to try and resolving the liquidity surplus problem, citing that he was not authorized to talk about the plan with the media.

Earlier during the unveiling of the monetary policy, NRB had announced that it would bring in a long-term instrument to mop up excessive loanable funds from the banking system if necessary.
NRB has been using reverse repo and deposit auctions as part of an open market operation to absorb liquidity from the market. While reverse repo has a maturity period of seven days, deposit auction holds the cash from the bank and financial institutions (BFIs) for a 90-day period.

Though the board of directors' meeting of NRB is yet to be held to take a final call on the review in the monetary policy, senior officials of the central bank told Republica that NRB was less likely to make any other major changes in its policy.

"The monetary policy will be reviewed by a meeting of the board of directors," Trilochan Pangeni, spokesperson of NRB, said, adding that the meeting was scheduled for next week.Asked whether the central bank will increase the cash reserve ratio (CRR) to address the liquidity surplus, the spokesperson said such a possibility was less likely. "The change in monetary policy is a subject to decision of the board. However, I do not see the possibility of a CRR rise as such a measure would increase the cost of funds for the bank and financial institutions," he said.

He also said that NRB would increase the frequency of open market operations to mop up liquidity from the market.

Min Bahadur Shrestha, Executive Director at the Public Debt Management Department, told Republica that the central bank has an outstanding amount of Rs 140 billion which it absorbed through monetary operations. "There is still a liquidity surplus of Rs 40 billion. The level of the fund is swinging, but we try to keep the level below Rs 30 billion," he added.

He also said NRB was preparing to introduce an 'NRB Bond' as part of the open market operations. "The bond will have a relatively longer maturity period, probably six months or a year. The open market operation management committee will take a decision about the maturity period after the appointment of a deputy governor who will head the committee before sending it to the board of directors for the decision," he added.