Banks ask NRB to let them trade US$ daily

KATHMANDU, JUL 08 -

Banks and financial institutions (BFIs) have asked the central bank to allow them to trade US dollars daily. BFIs buy or sell the greenback as per their requirement under a provision known as “currency intervention”. Currently, such transactions are permitted on three working days — Monday, Wednesday and Friday.

BFIs asked Nepal Rastra Bank (NRB) to let them trade on other days too due to a fluctuating exchange rate and surplus supply of the US dollar. The Nepal Bankers’ Association (NBA) made the request while presenting its recommendations to NRB for the upcoming monetary policy.

“Remittance transactions by banks have increased,” said Ashoke Rana, president of the NBA. “Allowing daily transactions would be a great help.” Bankers said that it would reduce the risk posed by fluctuations in the exchange rate. “If transactions could be carried out on a daily basis, rate fluctuations will not trouble us,” said a banker.

Bankers have also asked for this choice to avoid the problems caused by occasional unavailability of US currency in a small market like Nepal. 

While carrying out currency intervention, NRB collects information from all the BFIs about the amount of US dollars they want to buy or sell, and sets the exchange rate based on it. “After gathering such info, NRB determines the demand and supply situation of the greenback,” said a bank CEO. “The central bank then decides whether to buy or sell.”

However, NRB fixes the exchange rate daily for use of the government and individuals. If daily transactions are allowed, foreign investors too will know the exchange rate daily, said a banker.

Meanwhile, banks have asked the central bank to issue long-term bonds which can be bought directly from it. Bankers said that buying or selling the bonds being issued presently takes a long time as they are not long-term instruments and buyers are not readily available. “Such bonds can serve as a reference rate too,” said Rana. “Currently, the interest rate on one-year fixed deposit is taken as the reference rate.”

According to bankers, the maturity period of such bond should be longer than 10 years. As the rate on government treasury bills and inter-bank lending is pretty low at the moment, long-term bond will sell well in the market. “If long-term bonds with a return rate of 4 to 5 percent are issued, they will sell fast,” said Rana.

They can be sold on the international market too if global interest rates are low. India has moved to invite foreign investment from developed countries having excess liquidity through such bonds.

According to bankers, NRB can later supply the amount colleted through refinancing to BFIs to invest in long-term projects. “Currently, BFIs are not able to finance long-term projects due to asset-liability mismatch,” said Sashin Joshi, CEO of NIC Bank. “Our fund is of short-term nature.”

Meanwhile, bankers have demanded a clear definition of the interest rate corridor from NRB. According to an NRB official, they will be implementing the interest rate corridor through the upcoming monetary policy. But bankers still do not know how it works.

“NRB is yet to reveal how the interest rate corridor will be executed here,” said Joshi. “In the international market, it is determined by establishing rates on repo and reverse repo. Once the rates are established, the interest rate of the money market moves along with those rates.”

According to bankers, the stability on interest rate is very crucial to boost investors’ confidence. Bankers have also asked NRB to issue repo and reverse repo on a regular basis. NRB has not issued repo and reverse repo for a long time.

Source: http://www.ekantipur.com/2012/07/08/business/banks-ask-nrb-to-let-them-trade-us-daily/356798/