High liquidity compels NRB to raise deposit rate up

By Ajay Chhetri, Kathmandu, Jan 9: Nepal Rastra Bank (NRB) has raised the deposit rate to 3.09 from 2.76 as liquidity kept increasing in the financial market despite its efforts to balance it.

Surplus liquidity resurged to Rs 109 billion on January 5 from Rs 76 billion recorded on December 27.

The spilling over surplus liquidity in the financial market consequently has flattened the inter-bank interest rate curve around a band of 2 to 3 per cent all along a period between December 28 to January 4. However, the NRB monetary policy has set a target to clamp interbank interest rates between 4 to 7 per cent. This means the current interbank interest rate still falls below the monetary policy target rate.

NRB has resorted to liquidity mopping from the banking system as a remedial measure to lift the inter-bank interest rate above 4 per cent. To motivate the financial market to deposit its surplus money in NRB, it has been raising the weighted average interest rate on deposit collection. An outcome being anticipated from the absorption of liquidity in the central bank vault is a depletion of excess liquidity from the financial market and subsequently revert of the inter-bank interest rate to rise upward.

The weighted average interest rate on deposit collection was recorded at 2.76 per cent when surplus liquidity was recorded at Rs 76 billion on 27 December. When surplus liquidity went up to Rs 81.53 billion on January 4, the deposit collection rate needed to be raised to 3.09 per cent. It is above the current inter-bank interest rate of 2.84 per cent recorded on Jan 9.

As we see in the graph above, the blue curve of inter-bank interest rates has been seen rising since the beginning of 2024, however, it started falling after January 3. The red line weighted average deposit collection rate is seen always moving above the inter-bank interest rate. The curves indicate that as the inter-bank interest rate starts falling, the NRB quickly jumps to hook interest on deposit collection up. 

Deputy Spokesperson of NRB Dr. Dilliram Pokhrel said that the financial market will get the entertainment of the cushion of excess liquidity until it gets to start observing by accelerating the economic growth. He viewed that government expenditure and private-sector lending must gear up to relieve excess liquidity observed in the economy.