According to NRB data, the central bank absorbed the money through bidding among bank and financial institutions (BFIs) to ease excess liquidity surplus. The bidding for a total of Rs 97 billion held by the central bank for eighteen times in the last five months has been oversubscribed by 2.3 times, drawing bid amount of Rs 222.24 billion. BFIs flushed with excess cash have been scrambling to park their loan-able funds in the central bank that generates a little more than 0 percent interest.
The weighted average interest rate in the last reverse repo issue stood at 0.0001 percent, meaning a bank gets a return of Rs 1,000 for depositing Rs 1 billion in the central bank. The central bank recently issued reverse repo of Rs 1 billion on last Wednesday.
Likewise, the central bank mopped up Rs 52 billion from the banking industry through another open market operation named 'Deposit Collection' which has a maturity period of three months. BFIs have been getting a bit higher interest rates in the deposit auctions compared to the reverse repos.
According to the data of Public Debt Management (PDM) of NRB, the weighted average interest rate stood at 1.46 percent in the last deposit auction issued by the central bank of Rs 5 billion on last Thursday.
However, these all these money do not remain at the central bank for a long time as the central bank returns respective BFIs crediting with the interest in the principal amount once the maturity of the issues is expired. According to the data of PDM, the central bank has only Rs 111.15 billion outstanding amount toward deposit auction and Rs 1 billion toward reverse repo as of December 1.
In recent days, BFIs are scrambling to park their money in the central bank through these instruments even though it doesn't yield anything. Such act, however, has raised the regulator's eyebrow.
“It seems that they have been parking their excess money for regulatory arbitrage. Looks like are putting their money to maintain average interest rate spread capped at five percent by the central bank,” a central bank official told Republica, requesting anonymity. “Since the calculation method of the average interest rate spread allows the banks to include their investment in these instruments, it allows them to maintain low spread even without decreasing lending rate or increasing deposit rate,” the official added.
Meanwhile, the central bank is planning to mop up Rs 1 billion through reverse repo next week.
“The central bank introduces various instruments of open market operation based on the liquidity situation in the market. Since liquidity is subject to fluctuation due to inflow of remittances, flow of foreign aid and loans, private sector lending, and government expenditure, we bring these instruments as per the assessment of liquidity,” Trilochan Pangeni, spokesperson of NRB, told Republica.
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