February 14: Nepal Rastra Bank, which failed to implement the interest rate corridor since the beginning of the current fiscal year, announced the 'Standing Deposit Facility' tool on Tuesday. The officials of the central bank claim that the short-term interest rate can be kept within the limits of the corridor by allowing banks and financial institutions to deposit whatever amount they have in the form of excess liquidity in the central bank.

"Under the Standing Deposit Facility, the banks can deposit whatever amount of excess liquidity they have in the central bank," said the executive director of Nepal Rashtra Bank. Prakash Kumar Shrestha, adding, “This facility helps manage liquidity and maintain the interest rate within the limits of the corridor.”

The central bank had announced in the monetary policy of the current fiscal year that it will provide the Standing Deposit Facility if the weighted average of interbank interest rate falls below the deposit collection rate under the interest rate corridor. In order to implement the announcement, the central bank has amended the regulations and procedures related to open market transactions and made arrangements to provide Standing Liquidity Facility from mid-February.

Currently, the fixed the deposit collection rate of the central bank is 3 percent. Banks will be allowed to deposit excess liquidity with the Nepal Rashtra Bank at an interest rate of 3 percent.

Former banker Parshuram Kunwar Chhetri says that Standing Deposit Facility will help implement the interest rate corridor. "It is an attractive investment for banks to keep deposits in the central bank at 3 percent interest rate," he said, "This makes it easier to manage liquidity and implement the interest rate corridor."

The interbank interest rate has started falling below the target limit since mid-September of the current fiscal year. Even when the interbank interest rate fell below the limit, the central bank did not issue any monetary instrument to increase it till mid-November. After mid-November, deposit collection instruments were released in a hurry, but the interest rate was being kept within the limits of the corridor.

In order to implement the interest rate corridor effectively, the NRB has also implemented the 'Interest Rate Corridor Procedure 2076'.

According to the procedure, the upper limit of the bank rate and the lower limit of the deposit collection rate should be set and the interbank interest rate should be kept in between. For this purpose, Nepal Rastra Bank has a provision to use various monetary instruments for liquidity flow and mopping of excess of liquidity. In the current fiscal year, the central bank has collected more than Rs 550 billion through deposit collection tools.