Kathmandu, August 2

The weighted average interest rate on money market instrument called ‘term deposit’ has gone up to an all-time high of 1.87 per cent, with the fall in the portion of excess liquidity in the banking sector.

Nepal Rastra Bank (NRB) today launched ‘term deposit’ worth Rs five billion. These instruments drew bids worth Rs 11.30 billion.

Lately, oversubscription rate of these instruments has gradually started falling, indicating falling demand for these liquidity-mopping tools.

Last Friday, for instance, Rs five billion of these instruments floated by NRB drew bids of only Rs 8.75 billion. Such a response is a huge cry from days when these instruments used to be oversubscribed by four to five times.

“One reason for this is the decline in the portion of excess liquidity in the banking sector, as NRB is aggressively absorbing surplus funds,” said Min Bahadur Shrestha, chief of Public Debt Management Department at NRB.

Since July 12, NRB has absorbed over Rs 110 billion from the banking sector using instruments such as term deposit.

As a result, the excess liquidity in the banking sector has dropped to around Rs 60 billion from around Rs 126 billion in the second week of July.

And because of this, weighted average interest rate on these instruments have also started going up from an all-time low of 0.065 per cent recorded on July 12. The ‘term deposit’ instrument was introduced by NRB for the first time in August last year.

These instruments allow 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. The tool was introduced to provide some relief to banks and financial institutions sitting on piles of cash.

The banking sector has been dealing with the problem of excess liquidity for more than a year now due to rise in foreign income, especially workers’ remittance.

Per day workers’ remittance inflow stood at Rs 2.1 billion in the 10th and 11th month (mid-April to mid-June) of fiscal year 2014-15, which ended on July 16, as against Rs 1.58 billion in days prior to earthquake. Daily remittance flow even reached as much as Rs five billion at one point after the quakes, NRB said. Another reason for high liquidity in banking sector is rise in inflow of foreign aid in aftermath of the quakes.