Central bank all set for another reverse repo

KATHMANDU:

Central bank is all set to introduce the eighth round of reverse repo as excess liquidity is still bugging the financial sector.

“Nepal Rastra Bank (NRB) will use the instrument to absorb liquidity from the financial system as long as it is necessary. This week will also see a round of reverse repo as market requires it,” said NRB spokesperson Bhaskar Mani Gyanwali.

He, however, did not divulge the size of the reverse repo.

However, according to a source at NRB, central bank’s Open Market Operation Committee has decided to issue reverse repo of Rs 19 billion for seven days.

During the reverse repo, central bank accepts deposits from banks against the collateral of their securities with the central bank at a certain rate.

As the market is flush with loanable funds, banks are facing difficult time disposing excess money profitably because demand for loans is low. Since September, NRB has held reverse repo worth Rs 107 billion. It also held an outright purchase auction for securities worth Rs 8.5 billion to mop up liquidity.

“If the liquidity is high and requires to be tamed for a while, NRB will mop the money from circulation, and if there is liquidity strain it will start lending to financial institutions so that they have more money at hand,” pointed out Gyanwali.

“Right now we need to absorb excess funds from the banks,” he added.

In the last two rounds of reverse repo held last week and in mid-December, the weighted average reverse repo rate stood at 0.07 per cent.

Already, financial institutions —commercial banks, development banks and finance companies —have excess liquidity amounting to about Rs 65 billion. The excess money at hand has decreased profitability of banks.

Source: THT