KATHMANDU, July 4, 2012
The formulation of an interest rate corridor by the central bank is expected to do away with the bipolar spikes in the short-term interest rate.
The central bank is preparing a mechanism to formulate an interest rate corridor from the coming fiscal year as an additional monetary instrument of the monetary policy in order to handle short-term interest rate volatility.
“Nepal Rastra Bank (NRB) is working on preparing the mechanism for interest rate corridor which will symbolically determine the ceiling and floor for the interest rate,” according to the spokesperson for the central bank Bhaskar Mani Gyanwali.
In recent times, the domestic financial market has witnessed short-term interest rate skimming to an all time low following liquidity flush after going through a period of high interest rate.
The interest rate of treasury bills, being used as repo instrument and inter-bank lending rate indicate the movement of short-term rates. A 91-day treasury bill that was traded at 9.6 per cent in early 2010 has reached 0.9 per cent.
Likewise, inter-bank rate which had reached 14 per cent in 2010, has slipped below one per cent since December 2011 and rarely rose above the level. “Formulating an interest rate corridor is expected to counter such volatility and help form a tentative interest band that will more or less guide the interest rate movement of the money market,” added NRB spokesperson Gyanwali.
The central bank will indicate the interest band by determining the maximum rate at which the central bank will sell securities and minimum rate at which it will purchase securities. The movement of the short-term interest rate will take place between the two extremes.
At present, the central bank does not directly dictate the interest rate in the money market but uses its repo and reverse repo rate to guide the interest rate which now seems to be ineffective as interest rate for lending is still higher than 15 per cent in spite of treasury bills being traded at less than one per cent.”
There are not enough instruments to invest surplus funds amounting up to 25 per cent of the deposits, while the yield of government securities such as treasury bills is almost non-existent, that is why banks are unable to reduce lending rates,” said vice president of Nepal Bankers’ Association Upendra Paudyal, who is also the chief executive of NMB Bank.
Banks are compensating their cost of deposit collection by continuing with higher lending rate due to painfully low inter-bank and treasury bills rate. Both higher and lower short-term interest victimises the borrowers alike.
“If the central bank formulates an interest rate corridor, banks will be guaranteed a certain level of yield on securities, and both depositors and borrowers will get a better rate that is why we have been advocating for an interest rate corridor,” added Paudyal.
The profits of the banks have shrunk due to increased interest cost and the absence of projects to finance, and limited and low yielding avenues for alternative investment.
Source: THT
The formulation of an interest rate corridor by the central bank is expected to do away with the bipolar spikes in the short-term interest rate.
The central bank is preparing a mechanism to formulate an interest rate corridor from the coming fiscal year as an additional monetary instrument of the monetary policy in order to handle short-term interest rate volatility.
“Nepal Rastra Bank (NRB) is working on preparing the mechanism for interest rate corridor which will symbolically determine the ceiling and floor for the interest rate,” according to the spokesperson for the central bank Bhaskar Mani Gyanwali.
In recent times, the domestic financial market has witnessed short-term interest rate skimming to an all time low following liquidity flush after going through a period of high interest rate.
The interest rate of treasury bills, being used as repo instrument and inter-bank lending rate indicate the movement of short-term rates. A 91-day treasury bill that was traded at 9.6 per cent in early 2010 has reached 0.9 per cent.
Likewise, inter-bank rate which had reached 14 per cent in 2010, has slipped below one per cent since December 2011 and rarely rose above the level. “Formulating an interest rate corridor is expected to counter such volatility and help form a tentative interest band that will more or less guide the interest rate movement of the money market,” added NRB spokesperson Gyanwali.
The central bank will indicate the interest band by determining the maximum rate at which the central bank will sell securities and minimum rate at which it will purchase securities. The movement of the short-term interest rate will take place between the two extremes.
At present, the central bank does not directly dictate the interest rate in the money market but uses its repo and reverse repo rate to guide the interest rate which now seems to be ineffective as interest rate for lending is still higher than 15 per cent in spite of treasury bills being traded at less than one per cent.”
There are not enough instruments to invest surplus funds amounting up to 25 per cent of the deposits, while the yield of government securities such as treasury bills is almost non-existent, that is why banks are unable to reduce lending rates,” said vice president of Nepal Bankers’ Association Upendra Paudyal, who is also the chief executive of NMB Bank.
Banks are compensating their cost of deposit collection by continuing with higher lending rate due to painfully low inter-bank and treasury bills rate. Both higher and lower short-term interest victimises the borrowers alike.
“If the central bank formulates an interest rate corridor, banks will be guaranteed a certain level of yield on securities, and both depositors and borrowers will get a better rate that is why we have been advocating for an interest rate corridor,” added Paudyal.
The profits of the banks have shrunk due to increased interest cost and the absence of projects to finance, and limited and low yielding avenues for alternative investment.
Source: THT
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