Inflation lid of 7 percent sought

Except for reintroducing the long-abandoned Statutory Liquidity Ratio (SLR) into the banking system, the new Monetary Policy that the central bank is announcing on Friday will have no major policy-level changes to check galloping inflation, the highest in 17 years.

The Monetary Policy, endorsed by a board meeting of Nepal Rastra Bank (NRB) on Thursday morning, is targeting at keeping inflation at 7 percent, 6 percentage points lower than last year. The policy expects that various measures adopted by the fiscal budget to smoothen supplies of commodities in the market will lower inflation.

Despite a written demand put forward by the banking community, the policy is making no changes in the Cash Reserve Ratio (CRR) and the Bank Rate, major policy rates that can alter liquidity in the market, thereby influencing both deposit and lending rates. Currently, NRB maintains CRR and the Bank Rate at 5.5 and 6.5 percent respectively.

The new monetary policy, however, is reinstating SLR, a fund that a bank has to maintain in the form of cash or approved securities, after a gap of almost 18 years, so as to ensure greater financial stability in the banking system. Initially, NRB is likely to fix SLR at 6 percent, but it will go up to 8 percent in the second half of the current fiscal year.

"Recent global experience has demonstrated that the SLR can play an important role in enabling financial institutions to withstand unexpected shocks," said a source and added that the new arrangement will have no negative impact on the profitability of banks, as it will not squeeze their investment portfolios. "The SLR fund held by the banks will not be kept idle, but will be used for investing in government securities," said the source.

According to sources, the Monetary Policy has set two objectives, maintaining price stability and ensuring financial stability against unexpected external shocks.

Likewise, the monetary policy will be shifting its focus from the paid up capital of financial institutions, and will rather make capital fund the key barometer to gauge their financial health. Financial institutions will be allowed to raise their capital even by using reserve funds and retained earnings, among other things, in the days to come, said a source. The policy change is expected to help cool down the over-heated share market since required additional capital will not necessarily come from shareholders, said the source.

Similarly, the policy also includes bringing finance companies categorized as class C under the provision on mandatory loans for the deprived sector. As per the new policy to be announced, the financial companies will be asked to set aside one percent of their loan investment for the deprived sector as defined by the central bank. Currently, development and commercial banks are required to invest two and three percent respectively of their total loan exposures in this sector.

Likewise, the policy is also expected to increase personal overseas payment liability by US$ 2,000 to US$ 6,000. However, it is unlikely to change the existing foreign exchange facility limit for overseas travelers, which is currently at US$ 2,000.

NRB is likely to announce a policy on which loans extended under a certain category will be allowed to be counted under the Youth Self-employment Program, an employment-focused program announced by the Maoist-led government last year.

prem@myrepublica.com

Source: Republica