Active control of cash flows will help SBV effectively regulatemonetary policy. However, in order to control cash flows, SBV should be able to control all cash flows going out/coming into the economy and actively calculate the monetary multiplier.
In the past time, a large amount of money from state budget deposited at commercial banks made it hard for SBV to control the level of money generation of this amount. As a result, it was more difficult to control the credit growth rate of the economy since the credit provided by commercial banks still increased asthey stillhad a source of deposits from the state budget although the overall money supply was curbed. Also because of this, the control of market interest rates with indirect monetary instruments was also difficult and rather passive. At manytimes, the SBV withdrew money but interest rates on the interbank market were still down against the targetof tightening monetary policy.
In theory, the VND-denominated interest rates also considerably affect the exchange rate. Therefore, in order to control money flows and to be proactive in managing interest rates, SBV has closely cooperated with the Ministry of Finance in collecting information on state budget revenues and expenditures, foreign capital flows going out/coming into the stock market to moreactively regulate the money flows. Especially, SBV actively discussed with the Ministry of Finance and submitted to the Government for permission to transfer the State Treasury's deposits at commercial banks to SBV. This transfer was approved by the Government several years ago. However, as this transfer mighthave a significant impact on the market's volatility, SBV wouldrealizeit when appropriate.
In 2018, SBV started implementing this policy. According to the Government's report, about 150 trillion dongs of the state budget wastransferred to SBV. Accordingly, the deposits of State Treasury at some commercial banks sharply fell, resulting in a certain impact on the interest rate increase on the interbank market in the past seven months. However, this increase reflected the market trend and SBV can actively regulate these movements in accordance with the targetsof the monetary policy. Currently, the 6-month and 9-month interbank rates varyin the range of4 to 5%, which is very close to the short-term borrowingrate of commercial banks for the same terms.
Good control of VND-denominated interest rates will positively support the regulator in managing the exchange rate in line with the value of VND and supply of and demand for foreign currencies. This is demonstrated by thestable foreign exchange marketwithSBV’s current exchange rate management. The exchange rate has been closely linked to the changes of the real exchange rate and only allowed to go up and downin a fixed band around the central rate. In turn, the central rate is determined in the correlation between VND’s valueand the basket of currencies of Vietnam’s trading partners, which will be supportive in improving the trade balance of Vietnam.
It can be said that the fluctuations in the monetary market in the first 6 months of 2018 clearly reflected the activeness in the SBV’s monetary policy regulation. Interest rates and exchange rate changes have beenunder SBV’s control, allowingSBV to carry out the policy of transferring state treasury’s deposits from commercial banks to SBV. Thus, SBV’s control of cash flows has been improved, contributing to enhancing the efficiency of monetary policy, further promoting the development of the currency market.