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Review of the Monetary Policy 2070-71 According to NRB Act, 2002, monetary policy aims at maintaining price and

external sector stability, financial stability and facilitating high and sustainable economic growth. The monetary policy of 2070/71 is aimed at containing inflation within a desired limit, maintain external and financial sector stability, utilize credit in the productive sector and expand financial access. The Monetary Policy for the current fiscal year has been widely considered as a cautious one with focus on mobilization of excess liquidity in the financial system to productive sectors through channeling investment to hydropower, agriculture, small and medium enterprises, and export industries by providing refinancing facilities for loans floated. One of the major objectives of monetary policy is to attain 5.5 % economic growth along with objective to limit inflation rate at 8 % and also to maintain foreign exchange to cover the import of goods and services for at least 8 months. The monetary policy has sought to increase internal credit by 17.1 percent to achieve the economic growth target. The commercial banks cash reserve ratio ( the part of total deposits that BFIs should keep at NRB) has been reduced to 5% for A class, 4.5 % for B class and 4% for C class, which is bound to make liquidity available to commercial banks that can be used to expand lending. Refinancing rate for agriculture, hydro-power and other productive sectors have been decreased to 5% from the earlier 6%. Likewise, the policy has also specified Statutory Liquidity Ratio (SLR) of 12% for category A, 9% for category B and 8% for category C financial institutions, which is 1% decrease from earlier provision. SLR is the percentage of total currency deposits invested in government securities or kept at the central bank. Similarly, the policy has the provision to maintain Credit-Deposit Ratio (CDR) at 80%. The policy has made provisions for commercial banks to flow 20% of total loans in the productive sector including at least 12% in agriculture and energy sector until Ashad 2072 B.S. The monetary policy has also announced to take prompt corrective action (PCA) against banks and financial institutions failing to maintain adequate liquidity. Previously, such action was taken only for BFIs failing to maintain capital adequacy ratio at the required level. The NRB will also introduce guideline on acquisition to encourage consolidation of the banking sector. Similarly, deadline of increasing the paid-up capital to the required level has been extended to Mid-July

2014 from earlier Mid-July 2013. Provision of stress testing is made mandatory for national level finance companies in order to minimize risks. The policy has announced extending the base rate of interest by making it mandatory for all commercial banks to make public the base rate every month. Under this provision, banks and financial institutions will have to determine their interest rates on the basis of base rate. The central bank has taken measures to maintain the spread rate (difference between interest rates on deposits and loans) at 5% whereas it was 7.1% in the previous year. Furthermore, the central bank has decided to give foreign exchange facility to foreign employment agencies on the basis of workers they send to overseas markets. On the other hand, private sector developers of infrastructure projects like hydropower, roads, and cable car services can now get loan in foreign currencies from commercial banks to import necessary plant and machineries for their projects. As a shift in policy, the central bank has allowed banks that have foreign currency in their agency banks abroad to invest up to 30 per cent of their balance in minimum risk instruments like call deposits and certificate of deposit.

The monetary policy as a whole has attempted to raise the credit flow to the productive sectors such as agriculture, energy and industry along with achieving the targeted growth rate and maintaining the inflation rate. The policy will result in the decline in the interest rate on deposits and loans with the new provision in the CRR. Production and investment is expected to be increased due to the flexibility on credit expansion. Furthermore, the policy has given priority for enhancing financial access to general people.

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