What Analraj Bhattarai say’s about ‘Interest Rate and Liquidity’

Kathmandu, 24 Dec. On the first week of current fiscal year (2074/75) the average Treasury Bill rate was 0.509%. It was below one percent till first week of second month of current fiscal year. Upward pressure was observed then after.

However it was able to maintain below 2 percent till first week of fourth month of current fiscal year. As liquidity pressure increased during fourth month, the pressure on rate was felt. The average T. Bill Rate took off and reached at 4.12 within last two weeks of the fourth month. Currently it is flaying at higher altitude at around 6 percent.

It expected that it will reach to another high of 8.5% within next few weeks. If Nepalese Central Bank and Ministry of Finance do not handle it properly, it is likely to cross 10% on or before end of seventh month of this year (i.e mid-February 2018). Nepalese fiscal year start from mid-July each year.

For the current fiscal year, Government of Nepal had allocated NPR 30.71 billion for interest payment, assuming TBill rate will remain below one percent. Situation has changed dramatically and if MOF and NRB do not make any policy response government will have to allocate additional NPR 70 billion towards interest payment. This will further reduce the capacity of Government to invest in infrastructure.

Higher interest yield on Treasury bill may be blessing in disguise. Assuming Net Interest Spread of 4%, if average yield of T. Bill crossed 6% then, the Net Interest Yield of BFIs will improve by 0.9%. However, average lending rate and average deposit rate will likely to rise further.

We feel that NRB should immediately take appropriate action to reduce unprecedented movement on Interest rates. NRB should revisit it’s policy stance on liquidity.