Why Did NRB Withdraw Liquidity?

Introduction: What Does Liquidity Withdrawal Mean?

Liquidity withdrawal refers to the process by which a central bank absorbs excess money circulating in the financial system. When too much cash remains idle in commercial banks, it increases the risk of inflation and weakens monetary stability.

In November 2025, the Nepal Rastra Bank (NRB) — Nepal’s central bank — announced that it would withdraw Rs. 50 billion from the market through a 175-day Deposit Collection Instrument (DCI). This move immediately drew attention from bankers, economists, and the public, raising one key question:

Why did NRB withdraw liquidity now — and what will it mean for Nepal’s financial system?

Let’s break it down step by step.

Understanding the Current Liquidity Situation in Nepal

In late 2025, Nepal’s financial system was sitting on excess liquidity of nearly Rs. 68 billion. Banks and financial institutions had more money than they could lend profitably. This happened mainly because:

• Loan demand remained slow despite falling interest rates.

• Government expenditure was delayed, keeping public funds parked in the system.

• Imports decreased, lowering the need for foreign currency outflow.

• Remittance inflows hit record highs, increasing deposit volumes.

When banks have more liquidity than needed, they typically park their idle funds in NRB’s Standing Deposit Facility (SDF) — a short-term interest-earning account at the central bank. However, as this excess cash builds up, it distorts market interest rates and weakens monetary control.

Hence, NRB decided to absorb a large portion through a long-term deposit instrument to maintain balance.

What is the Deposit Collection Instrument (DCI)?

The Deposit Collection Instrument is one of NRB’s monetary policy tools designed to manage liquidity in the banking system.

Under this instrument, NRB collects money from commercial banks and development banks for a fixed period — offering a small interest rate in return. The longer the maturity period, the more effectively NRB can stabilize the financial system.

In the November 2025 operation, NRB issued a 175-day DCI worth Rs. 50 billion — one of the longest maturities used so far.

This signals NRB’s preference for long-term liquidity control, rather than temporary measures that only last a few weeks.

Why Did NRB Decide to Withdraw Liquidity Now?

NRB’s decision came from a mix of economic, monetary, and policy considerations. Let’s look at the major reasons:

1. To Control Excess Liquidity

With Rs. 68 billion idle in the banking system, interest rates were falling too quickly. Such a condition can create short-term market distortions and encourage speculative activities rather than productive lending.

2. To Maintain Monetary Policy Discipline

NRB’s primary objective is price and financial stability. When banks have too much liquidity, credit may expand too rapidly in the future, potentially fueling inflation. By absorbing liquidity in advance, NRB ensures that inflation stays within the target range.

3. To Strengthen the Interest Rate Corridor

NRB operates an interest-rate corridor system, with:

• Bank Rate: 6 percent (upper limit)

• Standing Deposit Facility Rate: 2.75 percent (lower limit)

When liquidity is excessive, market interest rates tend to fall below the lower corridor limit. Liquidity withdrawal helps pull them back within the desired range.

4. To Reduce Reliance on Short-Term Instruments

In recent years, NRB increasingly used short-term tools such as overnight repos and short DCIs. The 175-day DCI shows a shift toward longer-term absorption, signaling that the central bank expects high liquidity to persist.

5. To Support Exchange-Rate Stability

An oversupply of Nepali currency can pressure the foreign-exchange market. By tightening domestic liquidity, NRB helps maintain exchange-rate stability against major currencies like the U.S. dollar and Indian rupee.

How Does Liquidity Withdrawal Work in Practice?

When NRB issues a DCI:

1. Banks bid to deposit their excess cash.

2. NRB accepts bids with the lowest interest rate offers first, prioritizing efficiency.

3. The absorbed money stays with NRB for the announced period (175 days).

4. After maturity, NRB returns the principal with a small interest payment.

This temporarily removes billions from circulation, keeping market liquidity tight and interest rates stable.

Impact of NRB’s Liquidity Withdrawal on the Economy

1. On Banks and Financial Institutions

Banks now have less idle money to invest or lend. This may slightly increase inter-bank borrowing costs but ensures more disciplined credit flow.

2. On Interest Rates

Short-term interest rates are likely to rise slightly, moving closer to the corridor’s midpoint. Deposit and lending rates, however, are unlikely to change drastically unless NRB continues large-scale absorption.

3. On Inflation

Tight liquidity prevents rapid credit expansion and thus helps control inflationary pressure. This supports NRB’s long-term goal of macroeconomic stability.

4. On the Private Sector

Businesses may experience slower credit approval in the short term, especially if banks become cautious. However, stable monetary conditions ultimately benefit long-term investment confidence.

Previous Major Liquidity Withdrawals by NRB

To understand how consistent this policy has been, here’s a look at NRB’s previous liquidity-withdrawal operations in recent years:

Over the past year, NRB has withdrawn more than Rs. 300 billion cumulatively through different instruments, showing a consistent approach toward liquidity management.

Long-Term Implications for Nepal’s Financial System

NRB’s repeated withdrawals point to a structural liquidity surplus in Nepal’s economy. Several factors contribute:

• Continuous remittance inflows increasing deposit bases.

• Slow loan disbursement due to cautious banking practices.

• Lower government capital expenditure rates.

If these trends persist, NRB may continue to rely on deposit-collection tools, repo reversals, and even open-market sales of securities to maintain monetary stability.

In the long run, these actions:

• Encourage better liquidity forecasting by banks.

• Keep inflation expectations under control.

• Strengthen market confidence in NRB’s monetary operations.

Expert Views on NRB’s Move

Economists and bankers largely agree that this withdrawal was timely and necessary.

“NRB’s decision to absorb Rs. 50 billion shows its commitment to keeping the market disciplined. Long-term absorption helps prevent short-term volatility,” says an economist from Tribhuvan University.

Commercial bankers, however, caution that if such withdrawals continue without matching loan demand growth, banks’ profitability could be affected due to lower lending opportunities.

Comparison with Past Monetary Policies

Earlier NRB policies focused mainly on short-term liquidity management through repo and reverse-repo operations. The shift toward longer-term deposit instruments marks a strategic evolution in NRB’s approach.

This reflects global central-bank trends — such as the Reserve Bank of India’s (RBI) use of variable-rate reverse-repo operations — aimed at maintaining medium-term liquidity balance.

Conclusion: A Step Toward Monetary Stability

NRB’s decision to withdraw Rs. 50 billion liquidity in November 2025 is not an isolated event but a part of its continuous effort to ensure monetary stability and price discipline in Nepal.

By absorbing excess liquidity through long-term instruments, the central bank:

• Prevents inflationary pressures,

• Maintains the interest-rate corridor,

• And reinforces confidence in Nepal’s financial system.

If economic activities pick up in the coming months, NRB may later inject liquidity through Standing Liquidity Facility (SLF) or repo operations, demonstrating the flexibility of its policy framework.

In short, the liquidity withdrawal represents a careful balancing act — one that keeps Nepal’s economy on the path of stability while preparing for sustainable growth in 2026 and beyond.

Frequently Asked Questions (FAQs)

What is liquidity withdrawal by NRB?

Liquidity withdrawal is when the Nepal Rastra Bank (NRB) absorbs excess money from the financial system. It’s done through tools like the Deposit Collection Instrument (DCI) to stabilize interest rates and prevent inflation.

Why did NRB withdraw Rs. 50 billion in November 2025?

NRB withdrew Rs. 50 billion to control excess liquidity of around Rs. 68 billion in the banking system. The move aims to keep interest rates within the policy corridor, curb inflation, and maintain financial stability.

How does liquidity withdrawal affect banks?

When NRB absorbs liquidity, banks have less idle cash. This helps them manage funds more efficiently, though it can slightly raise inter-bank rates and reduce short-term profitability.

Is liquidity withdrawal good for the economy?

Yes. It helps prevent inflation, ensures credit discipline, and strengthens monetary stability. In the long term, controlled liquidity supports sustainable economic growth.

What tools does NRB use to manage liquidity?

NRB uses several monetary instruments:

• Deposit Collection Instrument (DCI) – to withdraw liquidity.

• Standing Deposit Facility (SDF) – to park excess funds.

• Standing Liquidity Facility (SLF) and Repo – to inject liquidity when needed.

Will this affect loan and deposit rates in Nepal?

Short-term interest rates may rise slightly, but retail lending and deposit rates are expected to remain stable unless liquidity stays tight for a long period.

How much liquidity has NRB withdrawn in 2025?

Including the Rs. 50 billion withdrawal in November, NRB has absorbed over Rs. 300 billion in 2025 through various DCI operations — the highest in recent years.