December 14: Nepal Rastra Bank (NRB) has failed to implement the interest rate corridor, which was initiated with the aim of maintaining interest rate stability while minimizing the fluctuations in short-term interest rates.

Even though the interbank interest rate fell below the target limit from mid-September of the current fiscal year (FY) 2080/81, the central bank has failed to implement the interest rate corridor by mopping excess liquidity through the means of monetary instruments.

Since mid-September, the interbank interest rate has been consistently below the monetary policy target. Even when the interbank interest rate fell below the limit, the central bank did not use any monetary instrument to increase it till mid-October. After mid-November, the NRB used the deposit collection instruments in a hurry, but the interest rate has not been maintained within the limits of the corridor.

The arrangement for the interest rate corridor was introduced through the monetary policy of 2074. In order to make it effective, the central bank has implemented the 'Interest Rate Corridor Procedure 2076', according to which the interest rate corridor is considered as one of the main goals of the monetary policy.

According to the procedure, the central bank should fix the upper limit of the bank rate and the lower limit of the deposit collection rate and the interbank interest rate should be kept in between these two. In order to maintain this corridor, Nepal Rastra Bank can use various monetary instruments to release liquidity or to mop excess liquidity from the market. The monetary policy of the current year as set the target to keep the average interbank interest rate lower than the bank rate and higher than the deposit collection rate.

Last Friday, while releasing the first quarterly review of the monetary policy, the central bank lowered the bank rate from 7.5 percent to 7 percent and the deposit collection rate from 4.5 percent to 3 percent. But on Monday, the average interbank interest rate remained at 2.47 percent. The inter-bank interest rate, which fell below 1 percent on December 7, is yet to rise within the limit although it has increased after excess liquidity was mopped from the market through deposit collection tools.

From November 22 to December 10, the central bank collected Rs 125 billion from the market through deposit collection tools. Of that, Rs 45 billion have matured and returned to the market. Deposits worth Rs 10 billion will be maturing on Wednesday.

In the first quarterly review of the monetary policy, the central bank has admitted that the interest rate corridor could not be implemented in the current fiscal year.

During a press conference held after the release of the quarterly review report of the monetary policy, NRB Governor Maha Prasad Adhikari mentioned that the implementation of the interest rate corridor will be effective in the coming days.

Due to non-disbursement of loans compared to the increase in deposits of banks and financial institutions, more liquidity has been seen in the financial system in the current fiscal year. The central bank has said that the interest rate will decrease after the review of the monetary policy, and this will increase the credit flow. As a result, it will help in maintaining the interest rate corridor.