Central Bank unveiling Monetary Policy today

With the challenge of tackling liquidity surplus that has flooded Nepali bank and financial institutions (BFIs) and having failed to tame the inflation rate below its own target in the previous year, Nepal Rastra Bank (NRB) is unveiling its Monetary Policy for Fiscal Year 2014/15 on Friday.

According to a high level official at NRB, the central bank is going to ´slightly tighten´ the monetary policy by restricting the supply of money. Central banks take this course of action to control the flow of money and curb inflation when it is rising too fast.

“Though there will be no major changes in the Monetary Policy in comparison to the last fiscal year´s policy, the introduction of a long term monetary instrument to soak up excess cash from commercial banks if the liquidity surplus starts posing problems in financial stability would be something new policy,” the high level official told Republica, adding that the interest rate of such ´term deposit´ would be fixed through auctions.

Against the government projection of inflation below 8 percent for Fiscal Year 2014/15, NRB is going to make its inflation target 8.5 percent, according to the source. “Keeping in view remittance inflow, liquidity surplus in the financial system, and credit expansion, among other factors, our inflation target would be higher than the projection of the government,” the official added.

•    Monetary Policy to be ´slightly´ tightened
•    Long term monetary instrument to be introduced
•    BFIs to be encouraged to increase loans to SME

Likewise, NRB is going to introduce a provision asking BFIs to increase their loans to the small and medium enterprises (SMEs) sector. “The policy will not increase the current level of compulsory deprived sector lending. But it will encourage them to increase their loan exposure to SMEs,” said the official.

Given the previous year’s monitory policy, NRB had increased the level of compulsory deprived sector lending to 4.5 percent, 4 percent and 3.5 percent of total loan portfolio for commercial banks, development banks and finance companies, respectively.

Bankers have been demanding that such compu
lsory provisions be scrapped all together.

According to NRB official, the cash reserve ratio of BFIs is unlikely to be changed either. “The idea is that NRB will encourage the implementation of the Basel III standard, which requires BFIs to have enough liquidity to cover liabilities for at least three months. However, a board meeting of NRB on Friday will take the final call in this regard,” the official added.

source: republica,17 july 2014