7th October 2025, Kathmandu
The announcement by the Monetary Management Department of Nepal Rastra Bank (NRB) today, October 7, 2025 (Ashoj 21, 2082), regarding the invitation of bids to collect a substantial Rs 90 billion in deposits marks a significant open market operation (OMO) move by the central bank.
NRB Invites Bids
This action is a standard but potent tool used by NRB to regulate liquidity and steer monetary policy within the Nepalese banking system.
Purpose and Monetary Context of Deposit Collection
The core function of this deposit collection exercise is the absorption of excess liquidity from the banking and financial sector. When commercial banks, development banks, and finance companies (classified as ‘A’, ‘B’, and ‘C’ category institutions, all eligible to participate) accumulate funds beyond what is necessary for their day-to-day operations and required reserves, a condition of surplus liquidity arises. This surplus money, if left unchecked, can pose several risks to macroeconomic stability.
Primarily, excess liquidity can exert downward pressure on short-term interest rates in the interbank market, potentially causing them to fall below the central bank’s desired corridor. This unintended lowering of the cost of funds can lead to a surge in lending, which may fuel inflationary pressures or result in the channeling of funds into speculative sectors, creating asset bubbles. By collecting Rs 90 billion for a 12-day period, the NRB is effectively withdrawing this amount of money from the system temporarily. This action tightens market liquidity, thus helping to maintain the weighted average interbank rate within the target range established by the monetary policy, and ultimately contributing to the central bank’s primary objectives of price stability and a sound balance of payments.
Mechanism and Timeline of the Instrument
The instrument used for this operation is a short-term Deposit Collection Instrument. The timeline for the current operation is highly specific and brief, which is characteristic of liquidity management through OMOs. All interested and eligible financial institutions are required to submit their bids online only by 3 PM on October 7, 2025 (Ashoj 21, 2082) (Today). This strict deadline underscores the urgency and market responsiveness required for such a monetary action.
The issuance date for the instrument is set for the same day, October 7, 2025 (Ashoj 21, 2082). Crucially, the deposits are being collected for a tenure of just 12 days. The date for the return of the principal amount along with the accrued interest is scheduled for October 19, 2025 (Kartik 2, 2082). This short-term nature indicates that the NRB views the current liquidity surplus as a temporary phenomenon that requires immediate, short-duration intervention, rather than a structural issue that would necessitate a longer-term measure like an NRB Bond.
Bidding Process and Interest Rate Determination
The mechanism for determining the return on this deposit is a competitive bidding process. This is a market-based approach, ensuring that the interest rate paid by the NRB is a true reflection of the market’s current cost of funds. Banks and financial institutions bid by proposing the interest rate at which they are willing to deposit their funds with the central bank.
The eligibility for participation is restricted to licensed ‘A’, ‘B’, and ‘C’ category banks and financial institutions, encompassing Commercial Banks, Development Banks, and Finance Companies, as they are the primary holders of the liquidity being targeted.
The bidding requirements stipulate a minimum bid of Rs 100 million, with all subsequent increments needing to be in multiples of Rs 50 million. This ensures that only institutions with significant surplus liquidity participate, streamlining the process and focusing the operation on institutional-level liquidity management.
The central bank’s allotment logic prioritizes the lowest bids. This is logical from the NRB’s perspective as a borrower; it aims to mop up the target amount at the lowest possible cost. Institutions offering the lowest interest rates will be allotted the deposits first. In a scenario where multiple institutions propose the same, lowest interest rate, and the cumulative bid amount at that rate exceeds the remaining target amount, the allocation will be executed on a pro-rata basis. This ensures fairness and proportional distribution of the available deposit amount among the equally competitive bidders.
Implications for the Financial System
The withdrawal of Rs 90 billion, even for a short period of 12 days, has immediate and predictable implications for the market. By reducing the available funds in the interbank market, the operation is expected to cause a slight upward adjustment in the short-term interest rates, thereby aligning them with the central bank’s desired monetary stance. For the participating banks, this instrument offers a risk-free avenue to temporarily invest their excess funds and earn a guaranteed return, albeit a low one in the context of high liquidity. In a period where credit demand from the real sector may be subdued, as is often the case when liquidity is high, this short-term deposit with the NRB is an attractive, secure option for asset deployment. The overall success of this operation lies in the central bank’s ability to fine-tune the banking sector’s liquidity, preventing financial instability without unnecessarily choking off the funds required for productive lending. The quick maturity date also ensures that the funds are released back into the system swiftly, providing the NRB with the flexibility to react to changing market conditions.
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