October 16: Nepal Rastra Bank has neglected the implementation of the interest rate corridor, which was started with the aim of maintaining interest rate stability by minimizing short-term interest rate fluctuations.

The main objective of the interest corridor is to keep the interbank interest rate within a certain limit. However, even though the interbank interest rate has fallen below the limit since the last one month, NRB has not used monetary instruments to maintain the interest rate.

NRB has set the target of keeping the average interbank interest rate higher than the bank rate and lower than the deposit collection rate in the monetary policy of the current financial year (FY). There is a provision in the policy to use various monetary tools to keep the interbank interest rate in the middle while keeping the upper limit of the interest rate corridor at 7.5 percent and the lower limit at 4.5 percent.

However, even though the interbank interest rate has fallen below the monetary policy target since September 13, NRB has not used monetary instruments to draw liquidity from the market to increase the interest rate. 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.

On September 13, the interbank interest rate fell to 4.14 percent. Since then, the interbank interest rate, which has been below the limit, remained at 1.90 percent even on Wednesday, October 11. Meanwhile, on October 6, the interbank interest rate had dropped to 1.79 percent.

According to the data of NRB, the average credit to deposit ratio (CD ratio) of banks on October 10 was 81.86 percent. As the banks are allowed to give loans by maintaining CD radio up to 90%, they still have the capacity to extend loans of around Rs 475 billion.

However, banks have been saying that there is no demand for loans due to high interest rates and weak economy. Due to high liquidity in banks due to lack of demand for loans, the interbank interest rate has fallen below the lower limit of the corridor.

Due to the fall in interest rates, the government also emphasized on raising domestic debt. The government changed the schedule to collect loans when interest rates fell. Anil Sharma, Chief Executive Officer of Nepal Bankers' Association says that the interbank interest rate decreased after the government allowed the amount of local level accumulated funds to be counted as deposits, and at the same time, the government also raised internal loans.

NRB Deputy Spokesperson Dr. Dilliram Pokharel says that the current interest rate is of a short-term nature and that monetary instruments were not used because the government insisted on raising internal debt.