Kathmandu, August 10

The money market instrument floated by Nepal Rastra Bank (NRB) today to launch the much-anticipated interest rate corridor remained undersubscribed, as very few banks and financial institutions (BFIs) took part in the open market operation.

Despite this, the corridor has formally been introduced for the first time in the country, and NRB, the central monetary authority, from now onwards will continue to mop up or inject liquidity into the banking sector to keep interest rates within a certain band and reduce interest rate volatility.

NRB today floated term deposit instrument with a maturity period of two weeks to mop up Rs 20 billion in excess liquidity from the banking sector.

Of this, term deposit worth only Rs 16.10 billion was subscribed, NRB said.

NRB had decided to float Rs 20 billion worth of term deposit instruments based on the excess liquidity level of around Rs 25 billion in the banking sector as on Monday.

“We are not exactly sure why the instruments remained undersubscribed, but one of the reasons may be the short notice extended to BFIs to take part in the operation,” said Min Bahadur Shrestha, executive director at NRB’s Public Debt Management Department, which oversees open market operations.

While auctioning similar instruments, NRB used to issue the notice one week in advance. This used to give ample time to BFIs to take part in the auction. “But this time we issued the notice yesterday. So, BFIs probably did not get enough time to make preparations,” Shrestha said.

This is probably the reason why only 16 commercial banks took part in

today’s operation, although invitation was extended to all commercial banks, development banks and finance companies.

“Another reason for under-subscription may be variation in the level of excess liquidity at different financial institutions,” said Shrestha. This means banks with high level of excess liquidity took part in today’s operation, while those with moderate level of excess liquidity refrained from subscribing to the instruments because of low interest rate.

The interest rate on the instrument launched today was fixed at 0.3045

per cent.

The rate was fixed by deducting 10 basis points, or 0.10 percentage point, from weighted average interbank rate of commercial banks of Monday. This means weighted average interbank rate of commercial banks stood at 0.4045 per cent on Monday.

NRB, in a guideline on interest rate corridor introduced yesterday, said term deposit rate would be fixed by deducting 0.10 percentage point

from weighted average interbank rate of commercial banks of two working days ago.

“Since instruments floated today remained undersubscribed, we will be launching similar operation tomorrow (Thursday). But this time we

will float instruments worth Rs 15 billion, as banking sector now has

excess liquidity of little over Rs 15 billion,” said Shrestha.

The interest on this tranche of term deposit has been fixed at 0.2487 per cent.

The interest rate corridor basically comprises three rates: standing liquidity facility (SLF) rate; repo, or policy, rate; and term deposit rate.

SLF rate is the rate at which NRB provides loans to BFIs for a maximum of five days in case there is severe shortage of cash. This rate forms the upper bound, or ceiling, of the corridor.

Repo rate is the rate at which NRB provides loans to BFIs for a period

of two weeks in case of liquidity crunch in the banking system.

This rate moves in the middle of the corridor and is fixed by adding 200

basis points, or two percentage points, to weighted average interbank rate

of commercial banks of two working days ago.

Term deposit rate, on the other hand, is the rate at which NRB borrows money from BFIs for a period of two weeks to mop up excess liquidity. This rate forms the floor of the corridor.