January 27: Nepal Rastra Bank (NRB) has issued reverse repo (repurchase agreement) after 18 months indicating an end to the liquidity crisis in the market. After the interbank interest rates of banks and financial institutions fell below the monetary policy target, NRB decided to mop the excess liquidity from the market.

NRB raised Rs 5 billion from the market through a 7-day reverse repo via bidding on Thursday.

Seven banks and financial institutions were ready to bid Rs 15.6 billion for the reverse repo issued on Thursday.

The bidders proposed the maximum interest rate of 4.46 percent and the minimum of 4.24 percent while the average interest rate proposed was 4.32 percent, NRB said.

The last time NRB mopped excess liquidity from the market through reverse repo and deposit collection tools was during July 2021. The central bank had mopped Rs 28.35 billion from the market through reverse repo on July 20, 2021 and Rs 31.65 billion was collected from the market on July 28 and August 5 through deposit collection tools. After that, NRB has been continuously injecting liquidity to the market.

Although there has been improvement in remittance inflow and an increase in deposit collection of banks, the banks were unable to expand credit due to high interest rates. Due to this, treasury bills and interbank interest rates are also decreasing.

NRB claimed that the reverse repo was issued after the interbank rate fell below the limit set by the monetary policy.

“Now there is no more liquidity in the market. Reverse repo was issued after the interbank rate fell below the monetary policy limit,” said a source at the NRB.

In the monetary policy of the current fiscal year, there is a provision to issue repo/reverse repo if the average interest rate of interbank transactions fluctuates more than 2 percentage points than the policy rate. NRB said that the average interest rate of inter-bank transactions of banks fell to 4.7 percent on Wednesday.

In the monetary policy of the current fiscal year, the target has been set to maintain the upper limit of the interest rate corridor, i.e. the bank rate at 8.5 percent and the lower limit, i.e. the deposit collection rate, at 5.5 percent.

By December of the current fiscal year, while deposits of banks and financial institutions increased by Rs 111.15 billion, they credit flow was limited to only Rs 73.3 billion.