Standing deposit facility key to making interest rate corridor effective- NRB study

KATHMANDU: A new study by Nepal Rastra Bank (NRB) has found that the Standing Deposit Facility (SDF) has become a crucial instrument in controlling interbank interest rates and ensuring the effectiveness of the country’s interest rate corridor system.

According to the research conducted by NRB Assistant Director Victor Kumar Sapkota, fluctuations in interbank rates are significantly influenced by the use—or lack of use—of the standing deposit facility. The study concludes that on days when banks are unable to access the facility, interbank rates tend to fall below the lower bound of the corridor.

SDF Plays Central Role in Liquidity Management

Nepal Rastra Bank has implemented an interest rate corridor to manage liquidity conditions and short-term interest rates in the financial system. The framework links policy instruments such as the policy rate, bank rate, and standing deposit rate to guide market rates.

Currently, NRB has set:

• Bank Rate: 5.75%
• Policy Rate: 4.25%
• Standing Deposit Facility Rate: 2.75%

These rates form the upper and lower bounds of the corridor, guiding liquidity absorption and injection in the banking system.

Under this system, banks borrow liquidity from the central bank through standing liquidity facilities or repo operations when there is a shortage, while excess liquidity is deposited back with NRB through the SDF.

Interbank Rate Behavior Linked to SDF Access

The study finds that when banks are not allowed to use the SDF, interbank rates often drop below the 2.75 percent lower corridor limit. However, when the facility is available regularly, interbank rates remain within the corridor band.

Before recent reforms, SDF access was limited to three days a week (Sunday, Tuesday, and Thursday). This restricted access led to significant deviations in interbank rates from the policy corridor.

Since the first week of Jestha, NRB has allowed daily access to the SDF, a move aimed at stabilizing short-term interest rates.

Conditions for Using the Facility

Under the revised arrangement, banks can access the SDF only if certain conditions are met, including:

• No outstanding interbank borrowing in domestic currency
• Minimum interest conditions on deposits not exceeding SDF rates
• Maintenance of required cash reserve ratios

The minimum deposit size for SDF placement is Rs 1 billion (10 crore), and larger amounts must be in multiples of Rs 50 million (5 crore).

The facility is available on all working days, except public holidays. However, interest calculations continue even on holidays, and maturity payments are settled on the next working day.

Findings and Policy Implications

The study highlights that when SDF is available, the probability of interbank rates staying above the lower corridor limit increases to 91 percent. In contrast, when the facility is not accessible, interbank rates tend to fall significantly below the SDF rate.

NRB officials say this indicates that SDF is becoming a critical stabilizing tool for monetary policy transmission and liquidity management.

Recommendation for Further Reform

The report recommends expanding SDF access further and making the mechanism more automated to improve efficiency. It also suggests increasing usage frequency and integrating the facility more deeply into daily liquidity operations.

Following these findings, Nepal Rastra Bank has already moved to make the standing deposit facility available on every business day, marking a significant shift in its open market operations framework.

Economists say the development strengthens NRB’s ability to manage short-term interest rates more effectively and improve overall financial system stability.