Nepal Rastra Bank (NRB) is expected to focus on taming inflation at 7.5 percent in its monetary policy for 2016-17 to be presented next week, according to a senior NRB official.

With an expansionary budget of more than Rs1 trillion in place, the central bank is in pressure to devise a monetary policy that could check inflation which is currently in double digits.

“We have completed all the preparations and we will roll out the monetary policy by Sunday evening,” said NRB Spokesperson Trilochan Pangeni. “The main objective of the policy will be limiting inflation at 7.5 percent and helping the economy to attain 6.5 percent growth as targeted by the budget,” said Pangeni.

Another highly-placed NRB source confirmed the central bank is planning to bring a tight monetary policy to counterbalance the expansionary annual budget.

In a tight monetary policy, the central bank controls the circulation of cash.

“In a bid to control money supply, the central bank will increasing the cash reserve ratio (CRR) for banks and financial institutions (BFIs) through this monetary policy,” said the source.

CRR refers to the minimum fraction of the total deposits of customers, which BFIs have to mandatorily hold as reserves either in cash or as deposits with the central bank. Increment in CRR is a condition whereby BFIs have to park additional cash in the central bank’s vault, squeezing their ability to lend.

The source did not disclose by how much the CRR will be raised, but an executive director said various NRB departments have suggested a hike in CRR by 0.5 percentage points. “We have made the suggestion considering the current economic situation, but it is up to the board to decide,” said the executive director.

Currently, NRB has provisioned 6 percent CRR for commercial banks, and 5 and 4 percent for development banks and finance companies, respectively.

The NRB, however, will not be increasing the statutory liquidity ratio (SLR), another tool to control money supply, from existing 12 percent. SLR is also a reserve requirement that BFIs has to maintain at the central bank in form of cash or other securities approved by the government.

According to the source, the upcoming monetary policy will largely give continuity past policies like increasing paid-up capital requirement for microfinance companies, implementing the Basel accord, and reducing cash-based transactions, among others.

The new monetary policy, according to central bank sources, will come up with provisions to encourage payments through the banking system. NRB Governor Chiranjivi Nepal also gave an indication of it during a recently held interaction programme on the upcoming monetary policy.

Although cash is the predominant mode of payment in Nepal, the central bank, according to Nepal, is working to promote payment through the banking system to curb the illegal economic activities and money laundering.'