September 27: Amid criticism that the Nepal Rastra Bank has not been supportive in making the economy vibrant,  it has been found that the central bank has  fixed the inter-bank rate lower than the target set in the monetary policy.

While issuing the monetary policy for the current fiscal year, Nepal Rastra Bank had set a target to maintain the average interbank interest rate higher than the bank rate and lower than the deposit collection rate.

The upper limit of the interest rate corridor at present is the bank rate of 7.5 percent and the lower limit of the deposit collection rate is 4.5 percent. In order to maintain the interest rate within this limit, there is a provision for the central bank to use various monetary instruments.

Although the interbank interest rate has fallen below the monetary policy target in the last two weeks, the central bank has not mopped excess liquidity from the market. In the monetary policy, it is mentioned that if the interest rate is higher or lower than the target, secondary market transactions and deposit collection will be opened. However, since September 13, the interbank interest rate has been consistently lower than the target. Even on Monday, the average interbank interest rate remained at 2.54 percent.

After the liquidity in the market increased and the interest rate fell below the target, the central bank collected Rs 20 billion through deposit collection tools on July 13. The deposit has matured on July 20 and has been returned to the market. Similarly, the reverse repo of Rs 20 billion with maturity period of 14 days, which was issued on July 12, also matured on July 26.

At that time, the average interbank interest rate had fallen below 1 percent. Since then, the central bank has not mopped liquidity from the market. Currently, banks and financial institutions have more than Rs 400 billion of liquidity.

Banks have not been able to invest new loans due to the slowdown in economic activities. The investment of banks, that are unable to expand credit flow, is now limited to the internal debts of the government.

At present, the government is raising internal debt aggressively. The central bank has not even implemented the announcement of the monetary policy in order to help the government raise debt at a low cost, according to Rashtra Bank sources.

"There is a representation of the Ministry of Finance in the open market transaction committee," said a director of the Nepal Rastra Bank, "Therefore, rather than implementing monetary policy, the market is being operated in such a way as to support the government."

Sources claimed that even though the main goal of the central bank is to maintain the interest rate within the limits, even the monetary policy has not been implemented under the pressure of the government.

Taking advantage of the interbank interest rate which is below the target, the government is raising domestic debt at a cheap rate. Only on Monday, the government renewed the treasury bills at an interest rate of 3.441 percent. In July last year, the interest rate of treasury bills had exceeded 12 percent.

The government, which announced that it will collect domestic debt equal to Rs 240 billion in the current year, started collecting the debt from late July. In the current year, the central bank has already raised Rs 59.21 billion loans for the government through the issuance of development bonds. Similarly, Rs 5 billion has been raised through treasury bills.

Nepal Rastra Bank’s Deputy Spokesperson Dr Dilliram Pokharel says that the central bank did not mop liquidity from the market because current interbank interest rate is of short-term.

"The inter-bank interest rate has fallen below the target after the government allowed the accumulated amount of the local level to be counted as deposits," he said, "Monetary instruments have not been issued because the liquidity is high and there is no long-term interest rate reduction."