Prime lending rate records new low; excess liquidity in money market soars

• AWPLR falls 12 bps to 5.71%
• To-date AWPLR has fallen 403bps
• CB prints nearly Rs.50bn in week ending Dec. 4

The benchmark prime lending rate touched a new low last week indicating that interest rates have still more room decline in response to the monetary easing measures taken by the Monetary Board so far this year while the excess liquidity in the money market soared.  

Average Weighted Prime Lending Rate (AWPLR), the rate which the banks use as benchmark to price short-term loans to their prime customers fell by 12 basis points (bps) or 5.71 percent by December 4 over the previous week. 

As a result the AWPLR beat its previous all-time low of 5.72 percent on October 23. 

With last week’s decline, the AWPLR has so far fallen by a total of 403 bps or 4.03 percent, the most on record.  The Monetary Board on November 26 reiterated that the banks are required to pass on the full benefits of the monetary policy action via lower lending rates as they saw such actions have still more room to run their course. 

“The Board, having noted the reduction in overall market lending rates so far during the year, stressed the need for continued downward adjustment in lending rates to boost economic growth in the absence of demand driven inflationary pressures, particularly considering the significant levels of excess liquidity prevailing in the domestic money market,” the Monetary Board said. 

Meanwhile, the excess liquidity in the money market soared by Rs.48.03 billion during the week from November 27 through December 4 as Central Bank’s holdings of government treasury bills and bonds increased by a similar amount. Overnight liquidity increases when the Central Bank purchases foreign exchange and converts them to rupees and also when they purchase treasury bills in the primary market—what is known as Central Bank liquidity provisions.  The most recent surge in the overnight liquidity was sparked predominantly by the Central Bank liquidity or what is known in common parlance as money printing. 

By December 4, the Central Bank held Rs.616.80 billion worth of treasury bills, up from Rs.568.12 billion a week earlier on November 27. The Central Bank maintains that the practice, which is necessitated by the pandemic to keep the government liquid, by no means spark near term inflation as the aggregate demand in the economy remains low while the economic growth is well below its potential weighed by the virus induced challenges.