Reverse repo planned to absorb extra cash

KATHMANDU, JAN 29 -

Nepal Rastra Bank ( NRB ) has absorbed Rs 157.5 billion from the economy through a previous reverse repo and will be conducting another reverse repo for Rs 19.5 billion on Sunday.

This will put the total amount soaked up from the market through this mechanism at Rs 177 billion. If the Rs 8.5 billion absorbed through an outright sale auction is added, the total amount mopped up by the central bank comes to Rs 185.5 billion.

A senior NRB official said that they would continue to conduct reverse repos based on the liquidity status in the banking system. Due to an increase in deposits and slowdown in demand for loans, the banking system has been awash in excess liquidity amounting to Rs 40 billion, according to NRB .

The high level of extra cash has prompted banks and financial institutions to deposit their money at NRB at interest rates as low as 0.41 percent maintained in the latest reverse repo. The interest rate maintained for both treasury bills and inter-banking borrowing is below 1 percent.

Meanwhile, Upendra Poudel, chief executive officer of NMB Bank, said that there was no alternative to a reverse repo in the short term until demand for loans from big projects increased. “There has been demand for credit, but not for big projects and in a sustained way,” he added.

According to him, the government’s failure to spend the development budget has also lowered demand for loans from industries which manufacture products used in infrastructure projects initiated by government agencies.

As the government has not been able to spend the development budget, its treasury is filled with cash amounting to Rs 78 billion, according to NRB .

“As the government is a big consumer of industrial goods such as cement and iron rods, lack of expenditure on projects like roads, bridges and other infrastructure has led to slowed demand for loans from the industrial sector,” said Poudel. He added that the country’s growth target may not be achieved due to the failure of both the government and the private sector.

Source: The Kathmandu Post