September 8: Nepal Rastra Bank (NRB) has implemented the work procedure related to the interest rate corridor 2076 (Second Amendment) in order to minimize the effects of the coronavirus pandemic on the nation’s economy. The revised work procedure has decreased the overnight repo rate to 3 percent. The rate was previously 3.5 percent. Similarly, the weekly deposit collection has been decreased to 1 percent, which is the lower limit of the corridor. This rate was previously 2 percent.

The rate of Standing Liquidity Facility (SLF) is still the upper limit of the corridor at 5 percent. The central bank issued and implemented the Work Procedure on Interest Rate Corridor, 2076 (Second Amendment, 2077) on Monday.

Dr. Gunakar Bhatta, the spokesperson of Nepal Rastra Bank, said that the revised work procedure is being implemented under the provision of the monetary policy of the fiscal year 2077 with an aim of bringing stability in the interest rates and modernizing the monetary management by reducing the fluctuations in the short-term interest rates.

Under the interest rate corridor, ‘A’, ‘B’ and ‘C’ class banks and financial institutions will be able to use the overnight repo facility at an interest rate of 3 percent per annum. The overnight repo can be taken once a week and up to 0.25 percent of the deposits made in Nepalese currency on the previous day in the bank or financial institution. In case of a leave on or before the day of application, the interbank interest rate on the previous day has to exceed 3 percent. Banks are required to submit an application asking for an overnight repo, a statement and the original copy of their securities to be kept as the collateral to the Public Debt Department at least an hour before the end of the office hours. The securities to be kept as the collateral must be worth 110 percent of the demanded amount. Institutions outside the valley will need to submit the original copy of the securities that will be kept as the collateral to their nearest branch office of the central bank.

Similarly, under the interest rate corridor, the liquidity can be absorbed through the use of a one-week deposit collection tool, which will collect the required amount of deposit through bidding at 1 percent interest rate. Since the amount collected through this will be recorded in the investment portfolio of the counterparty, this amount cannot be counted in their mandatory cash reserve. However, the amount can be included while calculating the Statutory Liquidity Ratio (SLR) and the liquidity ratio of the banks.