27th November 2024, Kathmandu
Nepal Rastra Bank (NRB) has announced a significant monetary policy measure to address the growing issue of excess liquidity in the market
NRB Withdraws NPR 100 Billion Liquidity
The central bank plans to withdraw a substantial NPR 100 billion through a 21-day liquidity absorption operation. This move is aimed at stabilizing the market, controlling inflation, and ensuring the overall health of the economy.
The Rising Concern of Excess Liquidity
Excess liquidity can lead to inflationary pressures as it can fuel excessive spending and investment. To counteract this, central banks often employ monetary policy tools to absorb excess funds. In Nepal’s case, the NRB has identified a need to take proactive measures to manage the surplus liquidity.
NRB’s Strategic Approach: A 21-Day Liquidity Absorption Operation
To implement this strategy, NRB will utilize deposit collection tools. This involves inviting commercial banks to deposit a certain amount of funds with the central bank for a specified period.
By incentivizing banks to park their excess funds with NRB, the central bank can effectively reduce the amount of money circulating in the economy.
Previous Attempts and Current Scenario
NRB has previously attempted to withdraw excess liquidity through various measures, including deposit auctions and permanent deposit facilities.
In a recent attempt, the central bank aimed to withdraw NPR 50 billion through a deposit collection mechanism. However, the response was underwhelming, with only NPR 9.5 billion in applications received.
Cumulative Liquidity Withdrawal
To date, NRB has already withdrawn a significant amount of liquidity from the market through various mechanisms. Specifically, the central bank has collected NPR 214 billion through deposit auctions and NPR 123 billion through permanent deposit facilities, bringing the total to NPR 337.8 billion.
The upcoming withdrawal of NPR 100 billion will further contribute to these efforts.
The Impact on the Economy
By managing liquidity levels, NRB aims to:
- Stabilize the financial market: Ensuring a balanced and orderly market environment.
- Mitigate inflationary pressures: Controlling the rate of price increases.
- Promote sustainable economic growth: Creating a conducive environment for businesses and consumers.
Future Outlook
The central bank will continue to monitor economic indicators and adjust its monetary policy stance as needed. By effectively managing liquidity, NRB aims to strike a balance between economic growth and price stability.
For more: NRB Withdraws NPR 100 Billion Liquidity