The amount of reverse repo undertaken to mop up excess money from the financial system in the last seven months is three-and-a-half times higher than the total reverse repos held between fiscal years 2005 to 2013 — indicating the gravity of liquidity excess this time.
Nepal Rastra Bank (NRB)’s Open Market Operation (OMO) has undertaken reverse repo to mop up excess liquidity since September 2013. The 14 rounds of biddings absorbed short-term liquidity worth Rs 216 billion from financial institutions till February 20. However, between fiscals 2005-06 and 2012-13, OMO was active in taking in funds worth Rs 60.67 billion.
As the banks grappled with disposing excess funds for a long time, the central bank in September 2013, launched a reverse repo of Rs five billion — first time in the past three years. Since then, it has been persistently mopping up excess funds for short term. Since the past seven bouts, the size of the reverse repo had been of Rs 19.5 billion. However, financial institutions want NRB to increase the amount so that their idle funds can rake in some returns.
“Firstly, our regulations constrict OMO to a certain level based on size of domestic deposits and the amount of securities in NRB’s possession,” said an official at NRB’s public bond management department.
During the reverse repo, financial institutions bid to lend to NRB at quoted rates and amount. NRB pledges government securities in its possession to borrow the quoted amount for a short term — seven to 14 days.
NRB allows instruments equivalent to 1.6 per cent of total domestic currency deposits. As of last week, domestic deposits held in commercial banks, development banks and finance companies amounted to Rs 1,206 billion.
“NRB is taking in maximum possible funds from the market, but at the same time, we are also not in favour of the central bank absorbing most of the excess money,” pointed out the official. There is some Rs 50 billion loanable funds in financial institutions that are unused.
“The banking system is in place to mobilise scattered deposits into economic activities, so the banks have to lower interest rates if they want to stimulate credit demand and let market forces play it out,” he added, stressing that NRB’s interventions can only help fix frictional liquidity fluctuations, not structural ones.
However, it is in NRB’s interest to balance the liquidity in the financial system to meet its monetary objectives of containing inflation and achieving targeted growth rate. Excess liquidity but low credit is feared to push inflation.
As the banks are sitting on the piles of idle cash, they are ready to lend to central bank at below one per cent rate during reverse repos. Since this season’s reverse repo began, rates had always been below one per cent.
“The interest rate is not the problem at present, because we have already started to provide loans below nine per cent rate,” informed CEO of Commerz and Trust Bank Nepal Anal Raj Bhattarai adding that for long-term large projects such as hydro, rates have gone down almost to seven per cent.
source: the himalayan times,23 feb 2014
LINK
Nepal Rastra Bank (NRB)’s Open Market Operation (OMO) has undertaken reverse repo to mop up excess liquidity since September 2013. The 14 rounds of biddings absorbed short-term liquidity worth Rs 216 billion from financial institutions till February 20. However, between fiscals 2005-06 and 2012-13, OMO was active in taking in funds worth Rs 60.67 billion.
As the banks grappled with disposing excess funds for a long time, the central bank in September 2013, launched a reverse repo of Rs five billion — first time in the past three years. Since then, it has been persistently mopping up excess funds for short term. Since the past seven bouts, the size of the reverse repo had been of Rs 19.5 billion. However, financial institutions want NRB to increase the amount so that their idle funds can rake in some returns.
“Firstly, our regulations constrict OMO to a certain level based on size of domestic deposits and the amount of securities in NRB’s possession,” said an official at NRB’s public bond management department.
During the reverse repo, financial institutions bid to lend to NRB at quoted rates and amount. NRB pledges government securities in its possession to borrow the quoted amount for a short term — seven to 14 days.
NRB allows instruments equivalent to 1.6 per cent of total domestic currency deposits. As of last week, domestic deposits held in commercial banks, development banks and finance companies amounted to Rs 1,206 billion.
“NRB is taking in maximum possible funds from the market, but at the same time, we are also not in favour of the central bank absorbing most of the excess money,” pointed out the official. There is some Rs 50 billion loanable funds in financial institutions that are unused.
“The banking system is in place to mobilise scattered deposits into economic activities, so the banks have to lower interest rates if they want to stimulate credit demand and let market forces play it out,” he added, stressing that NRB’s interventions can only help fix frictional liquidity fluctuations, not structural ones.
However, it is in NRB’s interest to balance the liquidity in the financial system to meet its monetary objectives of containing inflation and achieving targeted growth rate. Excess liquidity but low credit is feared to push inflation.
As the banks are sitting on the piles of idle cash, they are ready to lend to central bank at below one per cent rate during reverse repos. Since this season’s reverse repo began, rates had always been below one per cent.
“The interest rate is not the problem at present, because we have already started to provide loans below nine per cent rate,” informed CEO of Commerz and Trust Bank Nepal Anal Raj Bhattarai adding that for long-term large projects such as hydro, rates have gone down almost to seven per cent.
source: the himalayan times,23 feb 2014
LINK
Comments
Post a Comment