Bhutan is taking a decisive step toward modernizing its monetary policy framework. The Royal Monetary Authority (RMA) is preparing to introduce an Interest Rate Corridor (IRC) system, a key reform aimed at strengthening financial stability, improving liquidity management, and supporting the ngultrum’s peg to the Indian rupee.
The RMA has been working closely with the International Monetary Fund (IMF) to design the new system. The framework is expected to help the central bank manage liquidity more effectively and reduce reliance on administrative measures such as the Cash Reserve Ratio (CRR) and capital flow controls.
Despite years of groundwork, progress on establishing an active liquidity management system has been slow, hampered by technical and institutional challenges. With international reserves now below optimal levels, the RMA acknowledges the urgent need to operationalize a Domestic Liquidity Management Framework (DLMF), a foundational component of the new corridor system.
Currently, Bhutan’s monetary policy toolkit remains limited, relying heavily on direct controls rather than market-based instruments. This has constrained the incentives for residents to hold domestic currency, putting additional pressure on the exchange rate peg with India.
Experts believe the IRC and DLMF will help align Bhutan’s short-term interest rates with those in India, reduce arbitrage opportunities, and pave the way for a more developed and liquid capital market.
An IMF technical mission, led by experts Oleg Churiy and Bernard J. Laurens, worked closely with RMA officials and key stakeholders, including the Ministry of Finance, commercial banks, and the Royal Securities Exchange of Bhutan (RSEB). The team’s primary objective was to help Bhutan design an IRC framework that is simple, phased, and minimally disruptive to the banking system.
While acknowledging Bhutan’s steady progress, the IMF experts also pointed out remaining challenges — particularly in developing the collateral framework necessary for liquidity operations. The use of government securities as collateral will be critical to the corridor’s success. Effective and transparent communication by the RMA will also be vital to ensure that all stakeholders understand the reforms and their implications, given their potential economic and political sensitivities.
The IMF has outlined five key recommendations to guide Bhutan’s implementation of the IRC. The first is to reintroduce sweeping arrangements for government accounts to create a structural liquidity deficit, aligning short-term money market rates with the policy rate. A call has also been made to strengthen liquidity forecasting by enhancing collaboration between the RMA and the Treasury, including regular meetings and the exchange of government cash flow projections.
The IMF has also recommended adoption of a narrow collateral framework, accepting only government securities for liquidity operations and addressing high fees charged by the Securities Exchange of Bhutan (SEB) for its Central Securities Depository (CSD) system is also a priority.
The need to develop the domestic money market by phasing out the current fixed interest rate at which banks lend to one another and re-establishing the Money Market Contact Group (MMCG), which will provide banks with a platform for policy dialogue and interbank coordination, are other recommendations.
IMF has also outlined implementation of the IRC in phases, beginning with mock operations and a limited rollout of one-week Open Market Operations (OMOs) at the policy rate, before gradually moving to more sophisticated variable-rate tenders and liquidity forecasting mechanisms. The IMF also recommends setting a wider corridor band than that used for the Indian rupee to encourage interbank activity and develop a more responsive market for short-term funds.
The introduction of the Interest Rate Corridor represents a significant shift in Bhutan’s approach to monetary policy — from administrative controls to market-based management. If implemented successfully, the new framework will give the RMA greater flexibility to respond to liquidity fluctuations and external shocks while reinforcing Bhutan’s monetary and financial stability.
By adopting a phased and transparent approach, the RMA aims not only to modernize its policy instruments but also to build greater confidence among financial institutions, investors, and the public.
As Bhutan continues its journey toward a more resilient and sophisticated financial system, the IRC stands as a cornerstone reform — one that promises to strengthen the ngultrum, support economic growth, and safeguard the stability of the nation’s financial future.
Sherab Dorji
From Thimphu
