Monetary policy revises inflation target, to manage excess liquidity through long term monetary tools

Mid-term review of Monetary Policy for the current fiscal year 2013-14 today revised the inflation target upwards to 8.5 per cent from earlier eight per cent.
The excess liquidity in the banks and financial institutions in recent months and Constituent Assembly (CA) election that has pumped more money in the market fuelling the price hike forced the central bank to revise the inflation target. A week ago, the fiscal policy has also revised the inflation target.
As the central bank didnot revise the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) as expected, it claimed that long-term monetary tools will be used to mop up excess liquidity in the market in order to contain the inflation.
The government has started focusing on raising more internal loans through bonds instead of Treasury Bills that has a less maturity period. The central bank is not worried about the current state of liquidity in the banks, he said, adding that the high liquidity should be converted into loans. “The banks and financial institutions should expand their lending capacity in the productive sectors that will help manage excess liquidity and lessen the inflationary pressure too,” central bank governor Dr Yubaraj Khatiwada – during the mid-term review here today – said.
However, the central bank is cautious that the excess liquidity do not flow into the share market and push the Nepse unnaturally. “The central bank will ensure that liquidity would not be available easily to the stock market,” he added.
Likewise, ignoring the demands of the banks and financial institutions, the central bank stick to its formula for fixing the spread rate.
Khatiwada said that the five per cent spread rate was actually higher than what it should be. “The central bank had fixed the spread rate at five per cent considering that banks and financial institutions have to extend their services to rural areas and invest a certain portion of their loans in the productive sector,” he said, adding that the central bank has become flexible in fixing the spread rate at five per cent. “My intention was to keep it at three per cent.”
Asking the banks and financial institutions to bring down their spread rate to a maximum of five per cent within the current fiscal year, he said that there could be discussions on incorporating a few components of the operation cost while calculating the spread rate. “The operation cost could not be included in the spread rate as it means the difference between the interest rates on deposits and loans,” he added.
The fixed spread rate would make the banking sector more competitive, the governor said, reasoning that the possible entry of foreign banks that could work with a lower spread rate has to be foreseen and strengthen the domestic financial system. According to the central bank, the spread rate currently stands at 6.85 per cent, and it coming down.
Khatiwada also echoed the finance minister and claimed that the economic growth will meet the target of 5.5 per cent. “The agriculture productivity will increase this year due to sufficient rainfall,” he said, adding that capital expenditure can also be expected to increase with the formation of new government. “As it will increase industrial and economic activities, the projected growth rate of 5.5 per cent could be achieved.”
Meanwhile, due to growing number of troubled banks and financial institutions in recent days, the central bank is planning to form a separate Problem Institution Resolution Division, apart from bringing Acquisition Bylaw 2014 to encourage the stronger banks and financial institutions to acquire other bank or financial institution.