Dwindling deposit preludes repo rates hike in coming weeks

By Ajay Chhetri, Kathmandu, Aug 12: The repo rate is likely to hike steeper as the deposit of commercial banks has sharply dwindled in the backdrop of a continuous rise in the credit outflow towards the end of this week.

According to the Nepal Rastra Bank (NRB) data released on Thursday, while the deposit of commercial banks dwindled profoundly by Rs 9 billion, the credit outflow jumped over by Rs 2 billion on the same day alone.

The subsequent pressure emanating from the acceleration of an opposite trend between the deposit and credit outflow has triggered the interbank interest rate by 0.01 percentage point to hit 8.51 per cent on Friday afternoon.

Besides, the interbank interest rate, the repercussion of the opposite trend of the deposit and credit culminated in the significant rise in the credit to deposit (CD) ratio. It abruptly jumped to 88.25 on August 10 from 88.05 recorded on August 9. 

The interbank interest hike prelude the overheating repo rate in the forthcoming weeks. As it has already started to be stoking up in comparison to the previous fiscal year (FY). The bidding rate of the repo fluctuated in the range of 8.5 to 8.2 per cent during the auction on July 28, when the NRB injected Rs 30 billion on July 28th to cool off soaring rates.

The NRB could step in to operate repo to moderate rate hikes if the pressure will be triggered. The monetary policy is supposed go for repo if the interbank interest rate is up by plus 2 per cent from the policy rate of 7 per cent. In the circumstance where the interbank interest rate heading towards the upper bound of the interest rate corridor (IRC), the rate on forthcoming repo could heighten towards its tipping point.

The deputy spokesperson of NRB Narayan Prasad Pokhrel said that the maturity of the standing liquidity facility (SLF) could be one of the causes of the dive in the deposit this week. He further added that if the interbank interest rate continues to go higher, the NRB will opt to manage the excess demand of liquidity through repo.

Meanwhile, the borrowing cost may remain to be stable for an extended period as the Nepal Bankers Association (NBA) has decided no changes in interest rate.