Nepal Rastra Bank Prepares for Monetary Policy Review Amidst Calls for Flexibility

Nepal Rastra Bank is gearing up to unveil its first quarterly monetary policy review, expected to be released later this week. Despite the first quarter ending in Asoj, delays in the review have sparked concerns about potential confusion regarding the National Bank's policy guidance.

Officials from the National Bank suggest that the delay is due to the need for careful consideration. The Economic Research Department submitted recommendations to the governor by the end of Kartik, but the process of publicizing the review has taken longer than anticipated.

The upcoming review is poised to see reductions in the bank rate, policy rate, and deposit collection rate. Pressure to lower the deposit collection rate arises from the interbank interest rate persisting below 3% for three consecutive months.

Contrary to the interest rate corridor principle, the National Bank has been collecting deposits when the interbank interest rate is lower than the deposit collection rate. Officials argue that this approach prevents fluctuations in interest rates, thereby maintaining stability.

The recent government decision to count 60% of local-level savings as deposits has resulted in ample liquidity for banks. Rastra Bank officials suggest that the government should continue collecting deposits until the interbank interest rate aligns with the deposit collection rate.

Some officials propose implementing the interest rate corridor principle by reducing the deposit collection rate by 1 to 1.5 percentage points, along with a maximum reduction of 1 percentage point each for the policy rate and the bank rate.

While industrialists call for changes in regulations, including reducing the risk burden of share loans, the National Bank's focus in the upcoming review seems to be on adjusting interest rates rather than making extensive regulatory amendments.

Governor Maha Prasad Adhikari's delay in the review has raised eyebrows. Sources suggest that the governor may be under pressure to resist interest rate reductions and increase money supply. The private sector, backed by the government, has urged flexibility in regulatory provisions.

Critics speculate that the delay may be a response to pressure from a recent meeting initiated by Prime Minister Pushpa Kamal Dahal, where grievances against the National Bank were voiced. The governor's response to this pressure remains to be seen.

Despite potential calls for major changes, the National Bank seems inclined towards stability, emphasizing the need for careful consideration rather than drastic amendments in the upcoming monetary policy review.