NRB Expands Open Market Powers as It Moves to Tighten Liquidity Management

Kathmandu — Nepal Rastra Bank has expanded the authority of its monetary management department to conduct open market operations, giving the central bank greater flexibility to respond to sudden changes in banking-sector liquidity and short-term interest rates.

The changes have been introduced through the sixth amendment to the Nepal Rastra Bank Open Market Transaction Regulations, 2078. The revised regulation has come into effect immediately under the authority granted by the Nepal Rastra Bank Act, 2058.

The amendment does not alter the central bank’s existing policy rates. Instead, it strengthens the operational mechanism through which those rates are transmitted to the banking system. The move indicates that the central bank is focusing on improving the implementation of monetary policy rather than changing its overall policy direction.

Departmental transaction limit rises by 50 percent

The most significant change is the expansion of the Monetary Management Department’s authority to conduct regular open market transactions.

The department can now carry out repo, reverse repo and deposit-collection transactions of up to Rs 45 billion under its own authority. The previous ceiling was Rs 30 billion, meaning the operational limit has been increased by 50 percent.

The maximum amount that can be transacted in a single day has also risen by 50 percent—from Rs 10 billion to Rs 15 billion.

Under the revised arrangement, the department may conduct daily open market operations of up to Rs 15 billion, provided the outstanding amount of repo transactions does not exceed Rs 45 billion. The combined outstanding amount of reverse repo and deposit-collection instruments must also remain within the approved ceiling.

The increased limit will allow the central bank to intervene more quickly when liquidity conditions change. When banks face a shortage of lendable funds, the central bank can inject money through repo operations. When excess funds accumulate in the financial system, it can absorb liquidity through reverse repo or deposit-collection instruments.

Previously, larger interventions could require decisions at a higher institutional level. The expanded departmental authority is expected to reduce procedural delays and make routine monetary operations more responsive to market conditions.

However, the higher limit also places greater responsibility on the Monetary Management Department. Larger and faster interventions will require accurate liquidity forecasts because excessive absorption could unnecessarily tighten credit conditions, while excessive injection could push short-term interest rates below the central bank’s desired range.

Interest rate corridor remains unchanged

Nepal Rastra Bank has retained the existing rates under its interest rate corridor.

The upper limit, represented by the Standing Liquidity Facility, remains at 5.75 percent. The policy rate, represented by the overnight repo rate, stands at 4.25 percent, while the lower limit, represented by the Standing Deposit Facility, remains at 2.75 percent.

The policy rate is positioned exactly midway between the upper and lower limits, with a difference of 1.5 percentage points on either side. The overall corridor spans three percentage points.

An interest rate corridor is designed to keep short-term market rates, particularly the interbank rate, within a specified range. The upper rate represents the cost at which banks can obtain emergency or short-term liquidity from the central bank, while the lower rate represents the return available when banks deposit excess funds with the central bank.

By leaving the rates unchanged while strengthening the operating rules, the central bank appears to be addressing weaknesses in the transmission of monetary policy. The effectiveness of the corridor depends not only on the announced rates but also on how frequently and efficiently the central bank injects or absorbs liquidity.

One-month restriction on standing deposit access

The amendment has also revised the conditions governing the Standing Deposit Facility, commonly known as the SDF.

Banks and financial institutions participating in deposit-collection instruments, Nepal Rastra Bank bonds and the SDF will face restrictions if they publish savings or fixed-deposit rates below the lower limit of the interest rate corridor.

Under the new provision, a bank publishing a deposit rate below the corridor floor will be barred from using the Standing Deposit Facility for one month from the date the lower rate comes into effect.

Since the current corridor floor is 2.75 percent, a bank offering savings or fixed-deposit rates below 2.75 percent would lose access to the SDF for one month.

The revised rule is more specific than the earlier provision, under which access to the facility could be suspended without a clearly defined duration. By setting the restriction at one month, the central bank has introduced greater predictability while retaining a penalty for institutions that weaken the interest rate corridor.

The measure is intended to prevent an unusual situation in which a bank pays depositors less than the corridor floor but earns a higher return by placing the same excess funds with the central bank.

In practical terms, the provision discourages banks from sharply reducing deposit rates simply because the system is experiencing surplus liquidity. It also seeks to protect the corridor’s lower boundary as a meaningful benchmark for financial-market interest rates.

The impact on individual banks will depend on their liquidity position. Institutions holding substantial excess funds may be more cautious about lowering deposit rates because losing access to the SDF could reduce their interest income for a month.

Tougher punishment for false declarations

The revised regulation introduces stricter penalties for banks and financial institutions that obtain the Standing Deposit Facility by submitting false declarations or inaccurate information.

If misuse is detected, the institution will be required to return all interest earned through the facility. It will also have to pay a penalty calculated at twice the prevailing bank rate on the deposited amount for the entire period during which the facility was improperly used.

The provision significantly raises the potential cost of non-compliance. A bank could lose the return earned from the transaction and face an additional financial penalty based on the size and duration of the deposit.

The regulation also allows action against a counterparty institution, its directors, officials or employees if they violate the regulation or instructions issued by the central bank. Such action may be taken under Section 100 of the Nepal Rastra Bank Act.

This expansion of accountability suggests that the central bank is treating access to monetary facilities as a compliance-sensitive privilege rather than an automatic entitlement. It may also encourage banks to strengthen internal verification before making self-declarations to participate in central bank facilities.

Legal foundation for sterilised intervention

Another major change is the inclusion of a legal foundation for “sterilised intervention,” which the central bank had announced as part of its monetary policy framework.

Foreign exchange intervention can have a direct impact on domestic liquidity. When the central bank purchases foreign currency, it generally releases domestic currency into the financial system. This can increase the amount of money available to banks and place downward pressure on short-term interest rates.

Under the revised arrangement, foreign currency received from abroad may be managed in the same currency. The mechanism is expected to reduce the immediate need to release an equivalent amount of Nepali currency into the domestic market.

This could be particularly important when foreign exchange inflows or reserve accumulation are strong. Without sterilisation, repeated foreign currency purchases could create persistent excess liquidity, forcing the central bank to conduct additional deposit-collection operations and bear higher interest expenses.

Sterilised intervention allows the central bank to manage foreign exchange conditions without allowing the intervention to produce an unwanted expansion in domestic money supply.

The effectiveness of the measure will depend on how it is implemented, the volume of foreign currency involved and the instruments used to offset the liquidity impact. Sterilisation can improve monetary control, but it may also carry financial costs if the central bank has to pay interest to absorb domestic liquidity.

Definition of monetary instruments widened

The amendment has expanded the range of instruments recognised for open market operations.

The revised definition includes domestic currency, government securities, Nepal Rastra Bank bonds, repo and reverse repo transactions, deposit-collection instruments, outright purchases, outright sales, standing facilities and other monetary instruments determined by the central bank.

A wider definition gives Nepal Rastra Bank more flexibility to select instruments according to the nature and duration of a liquidity imbalance.

Repo operations are generally used to inject liquidity temporarily, while reverse repo and deposit-collection instruments are used to absorb excess funds. Outright purchases and sales of securities can have a more lasting impact on the amount of liquidity available in the banking system.

By formally recognising a broader range of instruments, the central bank is preparing for a more diversified approach to liquidity management instead of relying heavily on a limited number of short-term tools.

Lowest-rate bids to receive priority

The revised regulation also changes the allocation procedure for deposit-collection auctions conducted to absorb excess liquidity.

Banks and financial institutions offering the lowest interest rates will receive priority. This means the central bank will first accept funds from institutions willing to deposit their surplus liquidity at the lowest cost.

The arrangement could reduce the central bank’s interest expenses during liquidity-absorption operations. It may also promote more competitive bidding among banks holding excess funds.

If the interest rates offered in an auction do not exceed the lower limit of the corridor, the head of the Monetary Management Department will have the authority to allocate the bids.

Transactions conducted under departmental authority must subsequently be presented to the Open Market Operations Committee. This requirement allows immediate operational decisions while retaining institutional oversight after the transaction.

Although prioritising the lowest bid reduces cost, the central bank will still need to ensure that the auction process does not lead to excessive concentration among a small number of institutions.

Quarterly reporting made mandatory

The amendment requires the Monetary Management Department to prepare a quarterly report on open market operations.

The report must explain the procedures followed, the decisions taken, the impact of transactions on banking-sector liquidity and the average interest rates observed during the period.

It must also include a brief assessment of domestic and international financial and economic conditions.

The Open Market Operations Committee may revise the report before forwarding it to the governor through the department.

Mandatory reporting could improve internal accountability by requiring officials to review whether liquidity operations produced the intended result. It may also help the central bank evaluate the cost of its interventions and the relationship between policy rates, interbank rates and market liquidity.

However, the broader benefit will depend on whether the findings are made available to the public. Public disclosure of key data could help banks, investors and researchers better understand the central bank’s monetary operations.

Greater powers during exceptional conditions

The amendment allows the Open Market Operations Committee to conduct additional interventions during exceptional economic or financial circumstances.

If the normal transaction limits are insufficient to inject or absorb the required amount of liquidity, the committee may use appropriate monetary instruments after informing the governor through the department.

This provision gives the central bank operational space to respond to unusual conditions, including sudden deposit withdrawals, payment-system disruptions, external shocks or a sharp accumulation of surplus liquidity.

For liquidity imbalances lasting more than two weeks, the central bank may continue to use structural open market instruments. These include long-term repo, reverse repo, deposit collection, Nepal Rastra Bank bonds and outright purchases or sales of securities.

The distinction between short-term and structural operations is important. Temporary liquidity problems can often be addressed through overnight or short-duration facilities, while persistent imbalances may require longer-term instruments.

Committee structure left unchanged

The composition of the Open Market Operations Committee remains unchanged under the amendment.

The committee will continue to be chaired by a deputy governor. Its members include the executive directors of the Monetary Management Department and the Economic Research Department, along with a first-class representative from the Ministry of Finance. A director from the Monetary Management Department serves as member-secretary.

The committee must meet at least once a week. The presence of the chairperson and at least two other members will constitute a quorum.

Retaining the existing structure suggests that the amendment is focused on operational authority and procedures rather than institutional reorganisation.

Policy aimed at faster and more precise intervention

The overall amendment represents a shift towards quicker, rule-based and more flexible liquidity management.

The 50 percent increase in both the total departmental limit and the daily transaction ceiling gives the central bank more room to respond to changing market conditions. The revised SDF rule strengthens the lower boundary of the interest rate corridor, while the penalties for false reporting raise the cost of misuse.

The legal foundation for sterilised intervention is also significant because Nepal’s foreign exchange system can transmit external currency inflows directly into domestic banking liquidity. Managing that connection is becoming increasingly important for maintaining monetary control.

For commercial banks, the revised rules may mean closer monitoring of deposit rates, liquidity positions and compliance declarations. Institutions with large surplus funds will have to balance the benefits of reducing deposit costs against the risk of losing access to the SDF.

For borrowers and depositors, the effect will be indirect. More effective liquidity management could reduce extreme fluctuations in short-term interest rates. However, the amendment alone cannot determine lending and deposit rates, which will continue to depend on credit demand, deposit growth, loan recovery, government expenditure and wider economic conditions.

The amendment therefore does not amount to a change in the central bank’s monetary policy stance. Rather, it strengthens the machinery used to implement that stance. Its success will be measured by whether interbank rates remain within the corridor, excess liquidity is absorbed at a reasonable cost and temporary shortages are addressed without disrupting credit flows.