Nepal Rastra Bank's Strive for Balance in Inter-Bank Interest Rates

Market Mastery: Nepal Rastra Bank's Strive for Balance in Inter-Bank Interest Rates

In a surprising turn of events, the banks involved in inter-bank transactions, accustomed to a 2.65% interest rate, have set forth a demand exceeding 3% from the Nepal Rastra Bank. This peculiar demand unfolded during the Rastra Bank's call for proposals to gather deposits of Rs 20 arba through a bidding process.

Despite the Rastra Bank's existing deposit collection rate standing at 3%, the banks insisted on an interest rate surpassing 3%, resulting in a modest collection of only Rs 2.25 arba rupees. This incident marked the ninth occasion of deposit collection by the Rastra Bank, accumulating a total of 72.25 arba rupees from various banks.

The inter-bank interest rate, which had dipped below 1%, prompted the Rastra Bank to commence deposit collections on the 6th of Mangsir. However, as the Rastra Bank injected funds into the market, the inter-bank interest rate experienced an upward trajectory.

Prakash Shrestha, Executive Director and Head of the Economic Research Department at Nepal Rastra Bank, acknowledged the banks' pursuit of higher profits. He emphasized the necessity of aligning with deposit collection rates, stressing the importance of maintaining stability above a 3% inter-bank interest rate. Shrestha urged the Rastra Bank to persist with regular deposit collections until this stability is achieved.

Despite the initial setback in deposit collection, the Rastra Bank swiftly announced another call for proposals to gather 10 arba rupees through bidding on Poush 1. The focus will be on financial institutions willing to offer lower interest rates.

Former banker Bhuvan Dahal commended the Rastra Bank's proactive efforts to regulate interest rates by consistently collecting deposits from the market. Nepal Rastra Bank officials echoed this sentiment, emphasizing that a failure to collect deposits could lead to an undesirable decrease in interest rates. Such a scenario could adversely affect lending, especially in the midst of ongoing challenges posed by the COVID-19 pandemic.

As it stands, the Nepal Rastra Bank maintains an interest rate corridor of 3 to 7%, with the deposit collection rate at 3%, policy rate at 5.5%, and bank rate at 7%. Shrestha recommended active operation of the open market to ensure that interest rates stay within the limits established by the Rastra Bank.

In navigating these financial waves, the Rastra Bank's unwavering commitment to stability and prudence in the face of evolving market dynamics becomes increasingly crucial. The journey towards financial equilibrium continues, with each call for proposals and bid marking a strategic move in this quest for stability.