NRB to mop up Rs 3 billion through outright sale auction

KATHMANDU, APR 21: Nepal Rastra Bank (NRB) is mopping up Rs three billion from the banking sector on Tuesday through outright sale auction to ensure surplus funds do not flow into unproductive sectors and build inflationary pressure.

This is the first time in one-and-a-half years that the central monetary authority is using the instrument called outright sale auction to absorb excess liquidity.

“The central bank is using this tool because banks and financial institutions are likely to face the problem of excess liquidity for a longer time than we had thought,” a high-ranking NRB official said. This instrument will mature on September 8. “We hope this instrument will supplement efforts made by NRB so far to mop up excess liquidity,” the official said.

So far this fiscal year, which began in mid-July, NRB has been using term deposit and reverse repo to mop up excess liquidity.

Till date, NRB has used instrument called term deposit 13 times to absorb Rs 105 billion. This instrument allows commercial banks, development banks and finance companies to park their money at NRB for a period of three months at interest rates fixed through auction. Simultaneously, NRB has also used reverse repo 38 times to mop up Rs 255.80 billion from the banking sector so far this fiscal year. This instrument matures within a week.

NRB uses various instruments to absorb excess liquidity to prevent surplus funds from flowing into unproductive sectors, like stock and real estate markets, which tend to drive up asset prices and build inflationary pressure.

The banking system has been reporting high levels of excess liquidity since the beginning of this fiscal year — except around two months ago, when interbank lending rates shot up as high as five per cent due to deceleration in remittance flow and higher credit demand.