Kathmandu, January 28

Money market instrument called ‘term deposit’ floated today by Nepal Rastra Bank (NRB) was oversubscribed by over 3.5 times, indicating banks and financial institutions (BFIs) are still sitting atop a huge pile of cash despite repeated efforts made by the central bank to mop up excess liquidity.

Term deposit of Rs 10 billion floated by NRB drew bids worth Rs 35.70 billion from various BFIs, NRB data on open market operations show. Weighted average interest rate on term deposit floated today stood at 0.5283 per cent.

NRB had used similar instrument — which has a three-month maturity period — on Tuesday to mop up

Rs 10 billion. On that day, NRB drew bids worth Rs 37.35 billion at weighted average interest rate of 0.5949 per cent.

Fall in yield during today’s bidding indicates pressure being built by excess liquidity in the banking system.

As of Tuesday, the banking sector had excess liquidity of around Rs 58 billion, according to NRB.

“We have set a target of limiting the level of excess liquidity at Rs 30 billion. Unless we meet this target, we will continue to use money market instruments to absorb excess funds,” Min Bahadur Shrestha, chief of the Public Debt Management

Department at NRB, told The Himalayan Times.

Excess liquidity has lately been building up in the banking system due to surge in flow of remittance. Nepalis working abroad sent home Rs 271.37 billion in the first five months of the current fiscal year through mid-December. The amount was 19.4 per cent more than in the same period of last fiscal year.

“While more money is coming into the country, credit demand has not picked up and imports have slumped due to supply disruptions along Nepal-India border points,” Shrestha said.

In the first five months of the current fiscal year, credit growth rate fell by 55.95 per cent to Rs 40.42 billion, while imports took a dip of 32 per cent to Rs 213.83 billion.

“Low credit demand and slump in imports is raising the level of liquidity at BFIs,” Shrestha added.

To arrest the situation, NRB, so far this fiscal, has used term deposit instrument 27 times to mop up Rs 218.40 billion. It has also used reverse repo 26 times to absorb Rs 117.35 billion and conducted five outright sale auctions to mop up

Rs 9.10 billion.

“We will see the excess liquidity position on Friday. If there is need, we will float more instruments on Sunday to absorb excess funds,” Shrestha said.

The aggressiveness shown by NRB in absorbing excess liquidity has, however, come at a cost.

“So far this fiscal, we have spent around Rs 600 million to pay interest to BFIs that subscribed to our instruments,” Shrestha said, adding, “We hope the initiative that we have taken will prevent interest rates from remaining suppressed, which, in the long run, will lower chances of capital flight and contribute to macroeconomic stability.”