Mid-term review of monetary policy: NRB to maintain interest rate corridor

KATHMANDU, FEB 11 -

Nepal Rastra Bank (NRB) plans to maintain an ‘interest rate corridor’ by using monetary instruments to maintain interest rates at the appropriate level. The move comes amid sharp fluctuations and differences in bank interest rates between Nepal and India leading to problems in Nepal’s financial system.

The central bank announced the plan in its mid-term review of the monetary policy for the current fiscal year.

Addressing the launching of the mid-term review of the monetary policy, NRB Governor Yubaraj Khatiwada said that the move was planned to assure investors that they would see stability in interest rate on long-term loans and could plan accordingly.

Lately, bankers have been complaining that the virtually non-existent interest rate of treasury bills has forced them to keep lending rates at a higher level despite a surge in liquidity. The interest rate is considered as a reflection of the market interest rate in the country, but the market interest rate is still high while the rate of treasury bills has remained at 1 percent.

Central bank officials said that a difference in interest rates between Nepal and India had created trouble in Nepal’s banking system particularly when interest rates here remain low compared to India.

“Nepalis depositing money in Indian banks and purchasing insurance policies there has become common resulting in huge capital flight due to the interest rate difference which we have to address,” said NRB Spokesperson Bhaskarmani Gnawali. This tendency was also blamed for the liquidity crunch in the domestic banking system that lasted two years.

Considering that lending rates are still high despite a slight fall in deposit rates due to surplus liquidity, Governor Khatiwada said that banks and financial institutions should slash their lending rates, expand credit and make profits which will allow them to cut interest rates on deposits too.

He hoped that interest rates on lending would go down gradually as banks and financial institutions are struggling to bring them down as the deposits they had obtained by paying high interest are still with them.

The central bank reiterated its belief that the spread rate was still large and that it had not narrowed down despite low non-performing loans (NPL).

“The monetary policy will attempt to keep the interest rate at a reasonable level by monitoring the spread rate regularly,” states the review of the monetary policy.

The central bank said that the country’s financial system was heading towards stability which is shown by the good liquidity situation in all A, B and C class BFIs. According to NRB, the liquidity of commercial banks stands at 38 percent followed by development banks at 34 percent and finance companies at 28 percent. “People are depositing their savings in banks and financial institutions which they think more secure,” said Khatiwada.

The review of the monetary policy has supported the government’s forecast of economic growth and inflation of 4.5 percent and 8 percent respectively in the current fiscal year.

Governor Khatiwada, however, said that slow government spending has stood as the major problem to spur growth. As of the first six months of the current fiscal year, the government has savings worth Rs 35.21 billion at NRB.

Khatiwada said that a decrease in food inflation in India is expected to help bring down inflation here. “But the challenge is still there as a price rise in petroleum products and the service sector may affect the price status of the country,” he added.

The central bank has seen good progress in the country’s external sector with the balance of payments (BoP) expected to show a surplus of Rs 40 billion at the end of the fiscal year. The surplus as of the first five months stood at Rs 61 billion.

“The contribution of tourism and migrant workers has helped to ensure a better BoP level which is better what we had expected,” said Khatiwada. “The growth rate of tourism income and remittance may not be the same, and there are signs that imports may grow with the flexibility in the monetary policy lately.”

According to him, the country’s service account remained positive for the first time after a long time, and the capital account also remained positive which are good signs that the country’s external sector is strengthening.

Source: Kantipur