NRB mulls fixed rate on repo, reverse repo

KATHMANDU, JUL 20 -

Fixed interest rate regime on repo and reverse repo, keeping the standing liquidity facility (SLF) rate above the bank rate and making refinancing facilities more flexible are some of the measures the Nepal Rastra Bank (NRB) is considering adopting in the soon-to-be-unveiled monetary policy, according to a highly-placed source at NRB.

If the proposal, which is under discussion at NRB board, is approved, it will be a major departure from past practice: so far, the central bank has allowed the market to determine interest rate on the two monetary instruments. “Yes, it has been proposed. But we are yet to take a decision,” said an NRB board member.

Repo is a monetary tool which the central bank uses to inject liquidity in the banking system by purchasing treasury bills of banks and financial institutions (BFIs). While issuing reverse repo, NRB absorbs liquidity from BFIs by selling treasury bills.

According to a senior NRB official, the fixed interest rate regime was proposed as some BFIs were found involved in ‘rigging’ rates. Reserve Bank of India (RBI), India’s central bank, has also adopted fixed interest rate regime on repo and reserve repo.

NRB is also tightening its noose on the standing liquidity facility (SLF), a short-term injection of liquidity into BFIs. “The monetary policy is most likely to keep the interest rate of SLF above the bank rate,” said official. Currently, the bank rate is at 7 percent.

So far, SLF is given to BFIs at the interest rate 3 percent above the average interest rate on treasury bills. Currently, the average interest rate on treasury bills is at around 1-2 percent and BFIs are getting SLF at less than 5 percent. Given the abundance of liquidity with them, BFIs are hardly taking SLF these days. “As returns on SLF are very low, the central bank wants to keep it at a fixed level,” said the official.

NRB is also planning adopt more flexibility in refinancing facilities. It has been proposed to lower the lending rate under refinancing to 9 percent from the current 10 percent, according to the NRB official.

Currently, central bank provides general refinancing at 7 percent to BFIs, which they have to lend to the productive sector, including agriculture and industries, at not more than 10 percent. In the case of hydropower, NRB provides loans to BFIs at 6.5 percent, which they have to provide to power and transmission line projects at not more than 10 percent.

Interest rate on special refinancing — applicable for export, sick, small and cottage industries and foreign employment of a specified section of the people — has been maintained at 1.5 percent, and BFIs cannot charge more than 4.5 percent interest from borrowers under this facility.

An NRB board meeting on Thursday could not reach a conclusion on the matter and the next meeting is scheduled for Friday.

Source: The Kathmandu Post