Central bank to absorb excess liquidity to manage money supply

First the central bank reduced the Cash Reserve Ration (CRR) – without any need – that only helped flush the market with excess liquidity and now it is trying to mob it up also to contain the inflation that the excess liquidity could fuel due to distortion of money supply.

Nepal Rastra Bank (NRB) is ready to mop up Rs 5 billion tomorrow – through reverse repo – from financial institutions for the first time in the last three years – after September 15, 2010 – as banks are finding it difficult to dispose excess money profitably.
It might help absorb some of the excess liquidity temporarily from financial institutions but it could not help market to flush with liquidity again.

Central bank accepting deposits from banks at a certain rate is what refers to reverse repo. The central bank is accepting the deposits at …..per cent from the banks as they have been sitting on the pile of cash.

Commercial banks have excess liquidity of around Rs 60 billion at present, according to the central bank that revealed that the banks have collected deposits worth Rs 1,019 billion and floated loans worth Rs 757 billion by the end of August.
Earlier, in the fiscal year 2010-11, the central bank had conducted reverse repo worth Rs 19 billion during the first two months of the fiscal year.

Last fiscal year too, the central bank held an outright sale auction – to absorb liquidity – in which it sold securities worth Rs 8.5 billion to financial institutions.

However, excess liquidity with the banks will pull the interest rates down, where had seen increasing in last two fiscal years. The surplus liquidity has even brought down interbank lending rate to 0.26 per cent in the last couple of days.