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Kathmandu, Feb 25: Nepal Rastra Bank (NRB), the central bank of Nepal, appears to be struggling to manage excess liquidity and keep short-term interest rates within its target band. The central bank has failed to absorb surplus funds effectively, allowing the interbank rate to slip below the lower bound of the interest rate corridor.

Central banks regulate liquidity by injecting or withdrawing funds. To mop up excess liquidity, NRB uses tools such as NRB bonds, deposit collection instruments, and the standing deposit facility. When liquidity is tight, it injects money through the standing liquidity facility, repo, and outright purchase operations.

As surplus liquidity has persisted, NRB has expanded the use of longer-term instruments and extended the maturity of deposit collection tools to around six months. Even so, the impact has been limited. The interbank rate recently fell to 1.90 percent and stood at 2.4583 percent on Monday, both below the corridor floor of 2.75 percent.

Under the corridor framework, NRB is expected to absorb liquidity to keep the interbank rate above the floor. Its inability to do so signals weakening control over short-term rates.

Former NRB Executive Director Nar Bahadur Thapa said the liquidity glut reflects sluggish economic activity. Remittance inflows have improved, but credit demand remains weak, and government spending has lagged. He said weak private sector confidence has further slowed lending and investment.

NRB data show total deposits have reached Rs 7.744 trillion, while credit stands at Rs 5.804 trillion. The average credit-to-deposit ratio is 74.19 percent, well below the permitted ceiling of 90 percent, confirming surplus liquidity.

The central bank has already absorbed Rs 838 billion through various tools. Excess liquidity stood at Rs 265 billion last Thursday, dropped to Rs 51 billion on Saturday, and rose again to Rs 105 billion on Monday.

Thapa warned that without greater use of longer-term instruments, short-term rates may remain outside the corridor. He said issuing Rs 200 billion in one-year NRB bonds was insufficient and suggested the amount should have reached about Rs 500 billion.

He added that weak government spending and low private sector confidence continue to weigh on economic activity.

People’s News Monitoring Service