Central bank to form interest rate corridor

MID-TERM EVALUATION OF MONETARY POLICY

The central bank is mulling over forming interest rate corridor as an additional monetary instrument of the monetary policy in order to handle the short term interest rate volatility.
"We are planning to introduce interest rate corridors as a monetary instrument, as of lately the short-term interest rate has become less than one per cent which stood around 10 per cent less than a year ago," said central bank governor Dr Yubaraj Khatiwada during mid-term Monetary Policy evaluation here today.
"Such volatility is not even allowing formation of tentative interest rate band," he said, adding that the central bank needs to figure out in what tandems do deposit and lending rates move.
Interest rate corridor refers to the window between two interest rates — short term and long term deposit and lending — among others. Till now the central bank does not dictate the rate through direct interference. As for interest rate in financial sector, according to him, deposit and lending rate will go down gradually.
"Banks have borrowed deposits and lent for longer time frame so the interest will eventually go down as fixed deposits start getting matured," he said, suggested that banks can finance new projects at lowered rate since of late deposit rate has also gone down.
The governor also accepted that financial sector is going through a phase of credit crunch which he attributed to provision of maintaining Credit to Deposit Ratio at 80 per cent. "The surplus liquidity has to be directed to productive sector like agro, hydro, and SMEs, and central bank will see to it," he said, holding slow rate of capital expenditure responsible for contraction in new projects for financing.
The economy that was last year going through huge balance of payments (BoP) deficit, acute liquidity crunch, scaling price rise and nominal growth, now seems to be standing at a comfortable position, according to Dr Khatiwada.
"BoP account will be surplus by Rs 40 billion at minimum by the end of the current fiscal year, even if imports grow," he added. The monetary policy has estimated Rs 5 billion BoP surplus.
The increased inflow of tourists and higher remittance income was attributed for current account surplus of Rs 25 billion by the fifth month. During the same period, income through tourist arrivals and remittance has also increased by 37 per cent and 31 per cent, respectively.
"The action to salvage real estate and housing's problems will be taken after the committee formed by Finance Ministry to conduct comprehensive study on the sector is completed, he informed. "After insisting of mergers between class 'A', 'B' and 'C' financial institutions, central bank will push for mergers of micro finance institutions to avoid duplicity and over indebtedness of the creditors."
Meanwhile, he also assured that the country will not be blacklisted by international community for its failure to implement anti-money laundering laws.

Inflation at 8pc, economy to grow by 4.5pc
KATHMANDU: Central bank governor has assured that inflation will not exceed eight per cent in the current fiscal year. "The Indian rate of price rise has become negative that will put less pressure on Nepal," said central bank governor Dr Yubaraj Khatiwada. The expansion in money supply owning to growth in capital expenditure during second half of fiscal year and rise in prices of fuel could also not push the rise in general price level above eight per cent, he said, adding that the economy will grow by 4.5 per cent.

Revised estimates
Growth rate: 4.5 per cent from 5 per cent
Inflation: 8 per cent from seven per cent
Balance of Payments surplus: Rs 40 billion from Rs 5 billion
Broad money supply expansion: 15 per cent from 12.5 per cent
(Source: Nepal Rastra Bank)