Money market yields hit record low
KATHMANDU, SEP 02 -
Returns on money market instruments (with a maturity period of less than 100 days) have hit record low. Yields on Treasury bills, one of the main instruments of the money market, are at 21-year low, while the inter-bank lending rate has hit seven-year low.
According to the Nepal Rastra Bank (NRB), average rate of return on the 91-day Treasury bill was at 1.31 percent last year. This means a 100-rupee investment on a 91-day Treasury bill fetched a meager Rs 1.31. Similarly, the average rate of return on inter-bank lending was at 1.28 percent.
In FY 2010-11, the average rate of return on Treasury bills was 7.41 percent, while inter-bank lending fetched 8.44 percent interest.
If the returns from the money market continue to remain low, interest offered by banks and financial institutions (BFIs) on deposits will go down, increasing the risk of capital flight. “If the situation continues for a longer period, money will go out of the system and we might again face liquidity crunch,” said Kist Bank Deputy General Manager BN Gharti.
Experts said an excess liquidity in the banking system and low returns on money market instrument are not a good sign. “Excess liquidity coupled with low returns from the money market is an indication of capital flight,” said a money market expert. “Low returns on Treasury bills might be beneficial for the government in the short run, but it will have a negative impact on the economy in the long run.”
As the returns on such instruments are determined by the market demand and supply, lower returns means there is enough liquidity in the financial system—more than the market demand. The major reason behind the high money supply is increased remittance inflow. Last fiscal year, remittance increased by about 42 percent compared to the previous year to reach Rs 359 billion. “The surge in remittance increased the foreign exchange reserves and ultimately increasing the money supply,” the expert said. “But the financial sector lacks lending areas.”
As a result, BFIs are increasingly investing in government securities like Treasury-bills, resulting in decreased rate of return.
Low returns on money market instruments can also be linked with the economy. Generally, returns on such instruments increase when the economy is growing and decrease when the economy is stagnant. The return is considered real if it is greater than inflation rate. Therefore, if look at last year’s average return, it was at loss. According to NRB’s statistics, inflation was at 8.3 percent last year.
While the sole motive of inter-bank lending is to earn interest income, BFIs are required to make investment in Treasury bills to maintain the minimum liquidity ratio asked by the central bank. NRB, however, says investment in Treasury bills should not be measured in terms of loss or gain.
The money market expert said interest rate corridor should be implemented in order to control big interest rate fluctuations. Such a corridor fixes the minimum and maximum interest rates. It has been more than a year since NRB started planning the corridor, but is yet to implement.
Source: The Kathmandu Post
