Nepal Rastra Bank Liquidity Withdrawal: NPR 25 Billion Impact on Banking System & Interest Rates
30th March 2025, Kathmandu
The Nepal Rastra Bank (NRB) plans to withdraw NPR 25 billion from the banking system on Sunday. This decision comes as banks and financial institutions (BFIs) hold excess liquidity.
Nepal Rastra Bank Liquidity Withdrawal
The central bank will use a deposit collection instrument for a 21-day period to absorb the extra funds. Banks can participate in the bidding process, with a minimum deposit of NPR 10 crore and a maximum of NPR 5 crore per bid. If the total bids exceed the limit, deposits will be accepted proportionally.
Bidding and Participation
NRB has stated that bidding must be based on interest rates. Multiple bids under different interest rates are allowed. Only banks and financial institutions from Categories ‘A’, ‘B’, and ‘C’ can take part.
The principal and interest on these deposits will be repaid on 7th Baisakh (April 20, 2025). The interest rate will be determined by the bidding process.
Reasons for Liquidity Withdrawal
NRB regularly adjusts liquidity to maintain financial stability. Excess liquidity can lead to inflation and reduce interest rates on loans. The central bank uses tools like deposit collection, repo, and reverse repo operations to control liquidity flow.
This withdrawal will help regulate the supply of money in the market. It will also ensure that banks do not face liquidity overflow, which can disrupt economic balance.
Impact on Banks and Economy
Banks must prepare to deposit funds with the NRB. They may also adjust their lending activities based on liquidity conditions. The financial market will closely watch the effects of this liquidity absorption.
Interest rates may fluctuate depending on how banks respond. The lending environment may also shift as funds move between banks and NRB.
NRB’s action aligns with its monetary policy objectives. By withdrawing liquidity, it aims to prevent financial instability. This step ensures that the money supply remains controlled and that inflationary risks are minimized.
Conclusion
NRB’s decision to withdraw NPR 25 billion is part of its strategy to manage liquidity effectively. The process will involve banks bidding on deposits based on interest rates. The repayment of funds is scheduled for 7th Baisakh( 20 April).
This move will influence banking operations, interest rates, and overall market stability. Banks and financial institutions will need to adapt to the new liquidity conditions. The financial sector will monitor the outcomes closely.
For more: Nepal Rastra Bank Liquidity Withdrawal
