It’s a demand well-justified, especially in the face of rising interest rates for both lending and deposit. The central bank, in the first place, should not have raised the CRR by half-a-percentage point when it announced its annual monetary policy last year. What has happened since then is that interest rates have gone up by an average of two percentage points for lending and the deposit rates have shot up at an even higher rate of three percentage points. The higher interest rates may benefit the depositors, who are a minority, but it stifles investment and hurts the larger interest of the society.
When the central bank raised the CRR last year, it did so perhaps to curtail the soaring inflation. But even that was a misplaced concern—Nepal’s inflation is structurally tied up with the Indian inflation rate mostly because of an open and porous border between the two countries, free mobility of people and practically unlimited exchange facility of Nepali rupee with the Indian currency and vice versa. If we analyze the historical inflation trends in Nepal and India, the rates have almost always moved in the same direction and at the same pace. But there are of course some short-term exceptions such as now, which is because of the market cartels. For instance, the inflation rate in India has gone negative (which is referred to as deflation in economics) but in Nepal the inflation rate still hovers over two digits. It means the cartels are artificially keeping the market prices higher, defying the principle of open market and skimming off higher profits. In cases such as these, the state and local administrations should play an active role to bust the market cartels to ease the inflationary pressure.
The market is already reeling under a ‘mild’ liquidity crunch, which is also being reflected in rising inter-bank borrowing. The inter-bank rates at which the banks borrow from each other once touched 9 percent. As a result, most of the banks revised their lending rates even for the loans approved in the past, creating additional burdens on investors and consumers alike. It’s the investors and the consumers who together drive the wheel of economy and if they feel the heat, it will eventually be reflected in the economy. The central bank should therefore reduce the CRR by one percentage point, which is expected to free up about 4 billion rupees, and ease liquidity pressure in the market.
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