NRB Under Pressure to Halt Declining Interest Rates

Nepal Rastra Bank (NRB) has come under pressure to contain the continuous decline in interest rates amid rising liquidity in banks and financial institutions.

Despite the central bank’s efforts to mop up excess liquidity through deposit collection tools including the Standing Deposit Facility (SDF), interest rates have continued to fall. The average interest rate on deposits of commercial banks, which was above 5 percent a year ago, has now dropped below 4 percent.

Former banker Parshuram Kunwar Chhetri warned that interest rates could fall to zero if the central bank fails to absorb excess liquidity. “Even though NRB has been continuously mopping up excess liquidity, interest rates are still falling,” he said. “If the interest rate corridor had not been implemented, rates would have already hit zero.”

The NRB has been implementing the interest rate corridor to minimize volatility and ensure stability in interest rates. To make this mechanism more effective, it introduced the Interest Rate Corridor Procedure, 2019 (2076 BS). Under this procedure, the upper limit of the corridor is defined by the bank rate and the lower limit by the deposit collection rate. The interbank rate is expected to remain within this range, with the NRB using various monetary instruments to inject or absorb liquidity as needed.

In the current fiscal year, the NRB has set the bank rate at 6.5 percent and the deposit collection rate at 2.75 percent. However, the central bank has struggled to maintain the interbank rate within this corridor.

During the current fiscal year, the interbank rate fell below the lower limit on four occasions—on August 1, August 7, August 8, and September 8—and hovered at the lower limit on other days.

To strengthen the corridor, the NRB has allowed banks to deposit their excess liquidity under the Standing Deposit Facility since mid-February 2025 (Falgun 2081). Initially, banks could use this facility twice a week, but since mid-June 2024 (Asar 2081), the frequency has been increased to three times per week.

So far this fiscal year, the NRB has absorbed Rs 174 billion from the market through 43 rounds of the Standing Deposit Facility and Rs 971 billion through 27 deposit collection tenders. Of this total, Rs 843.55 billion currently remains with the central bank. Recently, the NRB has also started using long-term deposit collection instruments to absorb liquidity.