Monetary Policy Walks Tightrope

Reintroduces SLR,hopes to contain price hike at seven per cent

Recognising the high inflationary pressure, the country's central bank Nepal Rastra Bank (NRB) today announced a cautious and tight Monetary Policy for the fiscal year 2009-10.

"It is believed it will contribute to the prudent macroeconomic management, consolidation of the financial and external sectors and secured internal payments system to create a conducive economic environment for higher growth," said NRB governor Deependra Bahadur Kshetry, unveiling the eighth Monetary Policy.

"The existing liquidity overhang in the economy is sufficient to facilitate economic growth of 5.5 per cent," Kshetry said adding that the policy also envisions containing inflation at seven per cent.

However, the Monetary Policy -- in the last fiscal year also -- failed to contain the price hike and it is still doubted whether it will fuel growth and contain the price hike.

The policy has reintroduced Statutory Liquidity Ratio (SLR) after one-and-a-half decades to contain inflation and fuel growth.

SLR is commonly used to contain inflation and fuel growth by increasing or decreasing it, respectively.

This counteracts by decreas- ing or increasing the money supply in the system.

The commercial banks, development banks and finance companies are now required to invest in government securities six per cent, two per cent and one per cent of their total deposit mobilisation by second quarter, respectively and which will be increased to eight, three and two per cent respectively by the end of the fourth quarter.

"The old banks already have invested in government bonds and securities over the limit fixed by the policy," said Anil Shah, vice-president of Nepal Bankers' Association (NBA) and CEO of Nabil Bank.

"However, the new banks will feel the heat and it might put pressure on lending rates,"

he added.

Kishore Maharjan, CEO of Sunrise Bank agreed with Shah. "Lending rates may go up," he said.

Though the limit of paid-up capital is unchanged, the policy has made capital fund the main barometer of any finan- cial institution.

Apart from that, it has also opened the borders for domes- tic banks. They can now open branches outside the country. "The policy is flexible and can be adjusted according to the situation anytime," governor Kshetry said.

It has not changed any major rate like Cash Reserve Ratio (CRR), refinancing rates or the bank rate.