Central bank to issue another round of reverse repo, to mop up extra surplus liquidity to control double digit inflation

The central bank is planning to issue another round of reverse repo next week to mop up excess liquidity and contain price hike according to Monetary Policy that had targeted to keep inflation under 7.5 per cent.

The planned reverse repo of Rs 19.50 billion on Sunday could be the last one as the central bank is planning to bring in some permanent monetary instrument – like reducing Cash Reserve Ratio (CRR) and Statutiory Liquidity Ratio (SLR) that the Monetary Policy had revised downwards – to absorb excess liquidity instead of short term instrument like reverse repo.

The central bank data revealed that the inflation stands at 10.3 per cent in the fifth month of the current fiscal year 2013-14.

The central bank has already absorbed Rs 157.50 billion through earlier reverse repo, apart from Rs 8.50 billion through an outright sale auction.

With the latest Rs 19.50 billion, the total amount mopped up by the central bank from the market will come to Rs 185.5 billion.

The banking system has excess liquidity of around Rs 40 billion currently due to increasing deposit and low borrowing from the private sector as the business fraternity is waiting for the new government to take charge.

Likewise, the government's inability in spending in capital expenditure, the treasury has Rs 78 billion.

Central bank receives bid worth Rs 31.3b for Rs 19.50 billion reverse repo

The Rs 19.5 billion reverse repo – a financial instrument to mop up excess liquidity for short term from the market – today has received bids worth Rs 31.3 billion from 20 banks and financial institutions today.

Though the central bank has projected to contain inflation under 7.5 per cent , the excess liquidity has been fuelling the inflation forcing the central bank to repeatedly issue reverse repo to mop up excess liquidity from the banks.

Due to excess liquidity the inflation has surged to 10.3 per cent in the fifth month of the current fiscal year as the government and central bank both failed to contain the inflation.

According to the latest data, the banks and financial institutions have around Rs 40 billion at present. The low borrowing from the private sector due to low capital expenditure by the government and second Constituent Assembly (CA) election has flooded the money back to banking channel.

The central bank has fixed an interest rate of 0.41 per cent for the reverse repo, though the rate is fixed through open bidding.

The central bank has also lowered the Cash Reserve Ratio to four per cent for the banks giving them enough room to invest but the low credit demand has made them sit on the cash pile that has forced the Nepal Rastra Bank (NRB) absorb surplus funds from the banks and financial institutions.

Central bank readies for another reverse repo worth Rs 19.5 billion

When the central bank had reduced (Cash Reserve Ratio) CRR in the Monetary Policy for the current fiscal year 2013-14 to support private sector lending that could propel the economic growth, it had no idea the excess liquidity in banks and financial institutions is going to fuel inflation only.

Six months down the line, the banks and financial institutions are bulging with cash and private sector is still in 'wait and watch' mood, not really borrowing compared to the last fiscal, forcing the central bank to mop up excess liquidity every alternative week.

The central bank is all set to introduce the eighth round of reverse repo – tomorrow – to absorb excess liquidity from the financial system for seven days.

The reverse repo worth Rs 19.5 billion. So far the central bank had already issued seven reverse repo worth Rs 126.5 billion, apart from an outright sale auction worth Rs 8.5 billion in September to absorb liquidity from the banks and financial institutions.

In the last two rounds of reverse repo held last week, the weighted average reverse repo rate stood at 0.07 per cent.
The banks and financial institutions have been sitting on around Rs 70 billion excess liquidity that is expected to flow to stock market.

Central bank to mop up Rs 19.5 billion from banks

Central bank is issuing the largest reverse repo – in the current fiscal year –worth Rs 19.5 billion tomorrow to mop up excess liquidity from the banks and financial institutions – that will help contain inflationary pressure.

Unlike earlier five reverse repo of seven-day, it will be a 14-day reverse repo that is expected to mob up Rs 19.5 billion for two weeks.

According to the commercial banks, they have some Rs 65 billion surplus liquidity that has not been utilised due to low credit demand, also due to CA election that might have brought more liquidity into the banking channel.

Earlier, the central bank has mopped up some Rs 45 billion in the current fiscal year 2013-14 in various dates, except Rs 8.5 billion outright purchase auction for securities. But reverse repo is the short-term instrument to mob up excess liquidity from the banks and financial institutions. The central bank accepts deposits from banks against the collateral of securities with the central bank at a certain rate.

Due to excess liquidity in the banking channel – that is expected to fuel inflation and speculation in stock market – the short-term weighted interest rate of 91-day Treasury Bills dropped to 0.0164 per cent on November 26.