Monday, September 23, 2013

Central bank to mop up Rs 10 billion through reverse repo

The central bank is – for the third time in last one month – moping up the excess liquidity tomorrow from the banks to maintain the money supply and help contain the inflation, apart from stabilising the interest rates.
It is the third round of reverse repo in a month as the amount of loanable funds in the banking system remains surplus, according to the central bank that is undertaking another reverse repo worth Rs 10 billion tomorrow.
As of the current week, commercial banks alone have around Rs 60 billion loanable funds in their vaults.

According to the empirical studies, Rs 30 billion excess liquidity in the market would push the inflation up by five per cent. But, the market is flush with Rs 60 billion excess liquidity, also due to NRB’s reduction of CRR that will push the inflation upto around 15 per cent in the current fiscal year despite Monetary Policy and Fiscal Policy’s target of containing the inflation at eight per cent.

Likewise, the rise in inflation will fuel the poverty incidents in the country.
However, the central bank is trying to mob up the excess liquidity through a seven-day reverse repo so that financial institutions with excess liquidity can invest in an interest bearing instrument.
In the reverse repo, the central bank accepts deposits from banks against collateral of securities with it at a certain rate. The first reverse repo rate was at 0.078 per cent, while the second one was fixed at 0.06 per cent.
Last week, the central bank undertook outright purchase auction for securities worth Rs 8.5 billion also to mop up excess liquidity.
Likewise, on September 4 and September 10, it issued reverse repo worth Rs 5 billion and Rs 10 billion, respectively, after three years.
During the first reverse repo of Rs 5 billion on September 4, financial institutions bid for up to Rs 10 billion, while in the second one some 26 financial institutions presented bids worth Rs 42 billion as they, currently have excess liquidity.
The central bank’s intervention will also help maintain certain level of interest rates, according to the Nepal Rastra Bank that has been trying to bring a balance between deposit and lending by mopping up some funds to avoid interest rates from going bottom low.
Like some years earlier, the lower interest rates might help money going to informal or semi-formal sectors in search for higher interest putting the financial system under risk.
As of September 20, some 31 commercial banks collected deposits worth Rs 1,028 billion and floated loans worth Rs 763 billion.

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