Nepal Rastra Bank Moves To Mopping Up Excess Liquidity With 30 Billion Deposit Collection Facility

29th July 2026, Kathmandu

Nepal Rastra Bank has announced a major monetary intervention to absorb excess cash from the domestic banking sector.

NRB To Mop Liquidity

The central bank issued a notice inviting commercial banks and financial institutions to participate in a deposit collection auction worth NPR 30 billion. This move comes as part of ongoing effort by the central regulatory body to maintain monetary stability and regulate surplus cash floating in the financial market.

The decision highlights the persistent challenge of managing surplus liquidity within the Nepalese financial sector. Commercial banks have experienced sluggish credit growth relative to deposit collection, leading to high levels of idle funds. By mopping up excess capital, the central bank aims to stabilize interbank rates and prevent potential inflationary pressures.

Key Details of the Deposit Collection Auction

• Total Offer Amount: The central bank set the total issuance size at NPR 30 billion to absorb funds directly from qualified commercial banks and financial institutions.
• Tenure and Maturity Period: The collected funds will remain deposited with the central bank for a duration of 179 days. The principal amount along with accumulated interest will be returned to participating institutions on January 22, 2027.
• Eligibility Criteria: Only licensed Class A commercial banks, Class B development banks, and Class C finance companies approved by Nepal Rastra Bank are permitted to participate in the competitive bidding process.
• Bidding Limits: Participating institutions are required to bid a minimum amount of NPR 100 million. Bids above the minimum must be in multiples of NPR 50 million up to the total announced limit.
• Rate Determination: Interest rates for the deposits are determined dynamically through an online competitive bidding process where priority is given to the lowest interest rate bids submitted by participating banks.

Mechanics of Open Market Operations in Nepal

Open market operations serve as a vital policy tool for Nepal Rastra Bank to regulate liquidity and steer short term interest rates. When financial institutions hold significant amounts of uninvested capital, money market rates tend to drop sharply. Lower rates can lead to unwanted volatility, capital flight, or inefficient allocation of credit.

The central bank uses three main channels under its monetary management framework:

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• Short Term Deposit Collection: Used primarily when excess liquidity is temporary or when short term absorption is required to keep interbank rates within the target corridor.
• Reverse Repo Auctions: Employed for shorter duration liquidity management to fine tune daily or weekly liquidity conditions in the interbank market.
• Long Term Outright Sale and Treasury Instruments: Used when structural excess liquidity requires longer term absorption beyond standard open market auction periods.

By regularly tapping into the market with deposit collection tools, the central bank absorbs extra liquidity from bank vaults and parks it safely at designated interest rates. This helps maintain the interest rate corridor and keeps short term interbank lending rates near target benchmark levels.

Reasons Behind High Liquidity in the Banking Sector

Strong Remittance Inflows: Nepal continues to receive substantial foreign currency remittances from migrant workers abroad. These inflows convert into local currency deposits across commercial banks, continually expanding the domestic deposit base.

• Slow Credit Absorption: Loan disbursement by commercial banks has remained sluggish due to cautious borrowing by businesses, slow economic recovery in specific sectors, and tight credit appraisal standards.
• Government Expenditure Patterns: Seasonal patterns in government spending, particularly toward the end of fiscal periods, often inject substantial liquidity into the banking stream.
• Import Moderation: Moderation in overall import volume reduces the demand for trade finance and foreign exchange settlement, leaving more local currency idle within commercial banks.

Impact on Banks and the Broader Economy

Yield for Financial Institutions: The 179-day deposit instrument provides commercial banks with a risk free investment avenue for their excess funds, allowing them to earn interest income rather than holding uninvested cash reserves.

• Stabilization of Interest Rates: Removing NPR 30 billion from circulation prevents interbank interest rates from collapsing, helping establish a baseline floor for short term yield curves.
• Foreign Exchange Reserve Protection: Controlling excessive domestic liquidity reduces the risk of speculative capital outflows and helps protect official foreign exchange reserves.
• Encouraging Productive Lending: By adjusting the cost of capital and absorbing surplus funds, the central bank encourages financial institutions to re-evaluate their risk profiles and direct capital toward productive economic sectors rather than speculative ventures.

Future Outlook for Central Bank Monetary Policy

Nepal Rastra Bank continues to monitor daily liquidity positions, weighted average interbank rates, and credit to deposit ratios closely. If surplus liquidity remains high in the coming months, the central bank is expected to continue issuing regular deposit collection instruments and repo tools in accordance with its monetary policy calendar.

For commercial banks, managing cost of funds while seeking creditworthy borrowers remains a top operational priority. As the central bank active market operations stabilize interest rates, financial institutions are anticipated to gradually expand lending to key national sectors such as agriculture, hydropower, small businesses, and infrastructure development.

For More: NRB To Mop Liquidity