Kathmandu, June 30

A former president of the Nepal Bankers’ Association today called on the central bank to make effective use of the policy rate to ensure price and financial stability.

“Policy rates are used everywhere to manage consumer prices and market interest rates. But that has not been the case in Nepal,” former NBA chief Sashin Joshi told an interaction organised by Nepal Rastra Bank (NRB), adding, “NRB should use policy rate as an effective monetary tool to tame inflation and keep market interest rates within a certain band.”

In India, for instance, policy repo rate — or the central bank’s lending rate — stands at 6.5 per cent. And most of the other interest rates revolve around this.

For example, the reverse repo rate, or the interest at which the central bank absorbs money from banks, stands at six per cent, one-year term deposit rate stands between seven to 7.6 per cent, and yield on 91-day treasury-bills stands at 6.7292 per cent.

Also, the Indian central bank uses policy rate to increase or bring down money supply, which helps it to keep inflation within certain band. Inflation, in India, currently hovers around 5.7 per cent.

In Nepal, on the other hand, inflation stands at a high of 10 per cent, while interest rates continue to fluctuate. Also, real interest rates, whether on deposits parked in banks or government securities, are negative and have remained like this for years. So, there is no predictability on interest rates and consumer prices.

“The biggest challenge now facing us is higher consumer prices. This is one of the reasons why we have not been able to

effectively reduce the poverty level in the country,” NRB Governor Chiranjibi Nepal told the interaction organised to gather suggestions to prepare Monetary Policy of next fiscal year. “The need now is to contain inflation in single digit.”

Nepal also said that the country may face another type of problem as remittance growth rate has started decelerating. Nepal is currently enjoying a balance of payments surplus despite huge trade deficit because of higher inflow of money sent by Nepalis abroad. Also, foreign exchange reserve stands at almost 50 per cent of the gross domestic product because of higher remittance inflow.

“With decline in remittance income growth rate and ballooning trade deficit, our external sector may come under pressure,” Nepal said.