Nepal Rastra Bank (NRB) has announced plans to review the existing provision of the Standing Deposit Facility (SDF) in an effort to make the interest rate corridor more effective.
The decision was revealed through the third review of the monetary policy for the current Fiscal Year (FY). The move comes at a time when bank interest rates have been continuously declining amid sluggish economic activity.
Under the current SDF arrangement, banks are allowed to park their surplus funds with the central bank. The NRB uses this monetary tool to absorb excess liquidity from the banking system and manage short-term interest rates.
Despite the central bank’s repeated efforts to stabilize interest rates through various monetary instruments, the measures have had limited impact due to the ongoing economic slowdown. Commercial banks have recently reduced interest rates on individual fixed deposits to as low as 4.34 percent for the period between mid-May and mid-June.
In its policy review, the NRB stated that both foreign exchange reserves and inflation remain within the central bank’s target range. Considering the country’s weak economic growth, the central bank has decided to continue its flexible monetary policy stance.
The NRB has also retained the existing provisions related to the interest rate corridor, bank rate, mandatory cash reserve ratio, and statutory liquidity ratio.
