Central bank likely to tighten monetary policy

Published On: July 11, 2016 12:00 PM NPT By: Republica | @RepublicaNepal

KATHMANDU, July 11:Nepal Rastra Bank (NRB) is tightening its monetary policy for the fiscal year 2016/17 to balance the government's expansionary fiscal policy, according to the officials at the central bank.

"Since containing inflation below the target is one of our major concerns, the monetary policy will be tightened," a senior official of the NRB told Republica. "The central bank will use its tools to limit money supply and focus on addressing the demand-pull inflation."

Though the central bank is yet to decide on the policy rates like the Cash Reserve Requirement (CRR) and Statutory Liquidity Ratio (SLR), it is likely to increase the CRR rate so that bank and financial institutions (BFIs) will have to park their more cash in the central bank's vault, observers say. The CRR is currently set at 6 percent for commercial banks, 5 percent for development banks and 4 percent for finance companies.

The NRB is preparing to unveil the monetary policy for the upcoming fiscal year on Tuesday. Toeing the government's line, the central bank is also likely to set the inflation target at 7.5 percent, according to the official.

Similarly, the NRB will also reiterate its decision to raise the minimum paid-up capital requirement for BFIs as announced in the monetary policy of the current fiscal year, sending a message that it would be strict in enforcing the deadline of mid-July 2017 for the BFIs to increase the capital floor.

In a bid to support the government's plan to increase investment in infrastructure sector as well as productive sector, the central bank is also likely to increase productive sector lending requirement.

Meanwhile, the NRB is also planning to introduce cash transaction threshold that it has long been shelving. According to the official, the central bank is likely to set the cash threshold of Rs 1 million. If the threshold is introduced in the monetary policy, people cannot do transactions worth more than Rs 1 million in cash. The will have to use other negotiable instruments like checks, ATM Cards, Internet banking and mobile banking, among others.

Also the monetary policy will focus on liquidity management that has been the headache for the central bank for past few years, according to the official.