In the Monetary Policy for Fiscal Year 2015/16, the central bank had announced that it would issue NRB Bonds if need arises.The Public Debt Management Department (PDMD) of the central bank had even drafted the preliminary working procedure to issue the bonds. However, it could not get through the approval process from the open market operation committee earlier in the absence of deputy governor who heads the committee.
Now, the central bank has concluded that there was no need to issue NRB Bonds immediately as the liquidity situation has come down to a 'manageable level', a high level official of NRB told Republica.
"We had forwarded the procedure to issue NRB Bonds earlier. However, there is no need to issue such bonds immediately as the liquidity surplus has come down significantly in recent days due to other market instruments like deposit collection and reverse repo, among others," Min Bahadur Shrestha, executive director at the Public Debt Management Department (PDMD) of NRB, told Republica.
According to the PDMD, there is liquidity surplus of around Rs 20 billion in the banking system currently.
The idea of NRB Bonds was mooted in the monetary policy for the first time as a measure to mop up liquidity from the banking system for a relatively longer period since other instruments with shorter maturity period could not resolve the issue.
NRB has been using instruments such as reverse repo, outright sale and deposit auction to absorb excess liquidity from the banking sector. Reverse repo matures in a week while the deposit auction has the maturity period of 90 days. Outright sale's maturity depends on the remaining maturity of the paper that the BFIs hold, but generally does not last more than a year in Nepal.
The central bank is holding a total of Rs 99 billion that it mopped up from BFIs using such monetary instruments, according to the PDMD.
The decision to not issue the NRB Bonds immediately is also a calculated move in the context when the country is gearing toward reconstruction drive after the earthquakes. This means huge amount of money will be required to finance reconstruction activities.
"The government plans to make domestic borrowing to finance its reconstruction works. Once the reconstruction process gains pace, the government will be looking for a huge fund. If we issue the NRB Bonds now, there might be liquidity crunch. Such scenario will drive up interest rates for the funds that the government plans to collect," added Shrestha.
Interest rates have taken a downward path due to the excess loan-able fund in the banking system. For example, the weighted average interest rate for the last reverse repo issue of Rs 500 million held on last Wednesday remained at 0.6799 percent.
NRB SEEKS IMF EXPERTISE TO MANAGE LIQUIDITY
Meanwhile, NRB Governor Chiranjibi Nepal has requested the International Monetary Fund (IMF) to support Nepal on liquidity management on the basis of the fund's international expertise.
In a meeting with Bernard Laurens of IMF Liquidity Technical Assistance Mission on Tuesday, Nepal urged IMF to conduct a detailed study about the efficiency of monetary instruments that the central bank has been employing for liquidity management and make recommendation if other instruments are needed.
According to a statement issued by NRB, IMF's liquidity assistance mission team opined that there was also a need to develop the bond market for the management of the liquidity volatility.
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