Kathmandu, August 19 The intervention made by Nepal Rastra Bank to bring about correction in interest rates is gradually bearing fruit, as interbank rates, which had hit rock bottom, have gradually started going up. NRB, the central monetary authority, introduced the interest rate corridor (IRC) for the first time in the country last week to keep short-term market rates within a certain band and reduce interest rate volatility. The corridor uses weighted average interbank rate of commercial banks as a reference rate to fix two crucial rates — repo, or policy, rate, using which NRB injects liquidity into the banking sector; and term deposit rate, using which NRB mops up excess liquidity from the banking sector. When the corridor was first introduced on August 10, the weighted average interbank rate of commercial banks stood at 0.4045 per cent. Since then, Rs 16.45 billion in excess liquidity has been absorbed using two-week term deposit instrument, which, according to NRB, helped average interbank rate to rise to 2.2982 per cent on Tuesday. “We are happy the interbank rates have started moving upwards. We are also confident the interbank rates won’t fall further because we are determined to keep excess liquidity at zero level and have all instruments — both short- and long-term — to manage the liquidity situation,” said Min Bahadur Shrestha, executive director at NRB’s Public Debt Management Department, which oversees open market operations. Although higher interbank rate will immediately benefit depositors, who have long been forced to park money in banking institutions at negative real interest rates, it will also help NRB to reduce the interest spread in the corridor. Three different rates in IRC determine the interest spread. First is the standing liquidity facility (SLF) rate. Using this rate, NRB injects liquidity into the banking sector whenever there is shortage of funds. This rate has been fixed at seven per cent by NRB and forms the upper bound, or ceiling, of IRC. Second rate used in IRC is the repo, or policy, rate. NRB uses this rate to inject liquidity in the market for a period of two weeks. This rate floats in the middle of the corridor. It is fixed by adding 200 basis points, or two percentage points, to weighted average interbank rate of commercial banks of two working days ago. The third rate used in IRC is the two-week term deposit rate. This rate is used to absorb excess liquidity from the banking sector. This rate forms the lower bound, or floor, of the IRC. It is fixed by deducting 10 basis points, or 0.10 percentage point, from the weighted average interbank rate of commercial banks of two working days ago. When the IRC was first introduced, the ceiling rate stood at seven per cent, the repo rate, which floats in the middle of the corridor, stood at 2.4045 per cent, while the floor rate stood at 0.3045 per cent. This meant the interest spread in the corridor stood at 6.6955 per cent, which was pretty wide. This allowed interest rates to fluctuate between seven per cent and 0.3045 per cent, signalling high volatility in interest rates. With the hike in interbank rate to 2.2982 per cent, the mid, or repo, and floor rates have gone up to 4.2982 per cent and 2.1982 per cent, respectively, with ceiling rate remaining fixed at seven per cent. This means the interest spread has narrowed down to 4.8018 per cent. Although the interest spread has lately undergone correction, the wedge will not narrow down drastically because of the formula devised to fix mid and floor rates. Currently, the mid, or repo, rate is fixed by adding two percentage points to weighted average interbank rate of commercial banks, whereas floor, or term deposit, rate is fixed by deducting 0.10 percentage point from weighted average interbank rate of commercial banks. This means the interest spread between mid and floor rates will always stand at 2.10 per cent. “We will look into this matter when we revise the monetary policy at the end of the first quarter of this fiscal year,” Shrestha said. Two-week term deposit tomorrow KATHMANDU: Nepal Rastra Bank is mopping up Rs 5 billion from the banking sector on Sunday using two-week term deposit instrument. The interest rate on the instrument, introduced under the interest rate corridor, has been fixed at 2.1982 per cent. The rate was fixed by deducting 10 basis points from weighted average interbank rate of commercial banks of Tuesday.