Nepal Rastra Bank Addresses Excess Liquidity with Ongoing Withdrawals from Banking System

A surge in liquidity within banks and financial institutions has prompted decisive actions from the central bank, which is actively withdrawing deposits on a daily basis. On the 11th of Poush, the central bank withdrew a substantial 35 arba rupees, following up with a notice to withdraw an additional 20 arba rupees from deposits today.

In the month of Poush alone, the Rastra Bank has withdrawn a total of 105 arba rupees from banks and financial institutions through five separate transactions. Despite these efforts, the average interest rate for deposit collection has shown a moderate increase, rising from 2.4784% on Poush 1 to 2.8594% on Poush 11.

While the central bank's withdrawal attempts aim to manage liquidity, the interbank interest rate remains lower than the deposit collection rate set by the central bank at 3%. This suggests an abundance of liquidity in the market even as the central bank continues its withdrawal initiatives. The current scenario raises the possibility of a further decrease in interest rates if lending activities do not match the available liquidity.

The central bank, cognizant of the evolving situation, may find itself compelled to revisit its policies and potentially introduce more lenient provisions. In the first quarter review of the monetary policy, the central bank has already made some adjustments, signaling a willingness to adapt to changing market dynamics. If liquidity continues to increase at its current pace, the central bank may be prompted to implement additional measures to ensure a balanced and stable financial environment.