KARACHI: The State Bank of Pakistan (SBP) on Friday injected a massive 3.565 billion rupees over a seven-day period at 12.30% through a reverse repurchase agreement, as liquidity was distorted on the Money Market.
The SBP separately also conducted a Sharia-based open market operation (OMO) on the same day, injecting Rs 526 billion for seven days at 12.33% into Islamic banking institutions.
SBP is increasing the size of money market liquidity injections as banks face liquidity constraints. Additionally, demand for domestic borrowing has increased as the government seeks sufficient funds to meet higher spending needs.
The government borrows from commercial banks for financing purposes, as it has undertaken not to borrow from the central bank to comply with obligations under the amended SBP Act and the terms of the program of the IMF. The government depends on bank borrowing to finance the budget deficit as foreign financing tightens.
The budget deficit reached 2.56 trillion rupees or 4% of gross domestic product in the nine months of this financial year.
OMO is a tool used by a central bank (or a monetary authority) to inject or drain funds, depending on liquidity needs, from the banking system through the purchase or sale of eligible securities, according to information published on the SBPs. website.
Operationally, in the event of OMO (injections), SBP lends funds to banks/primary dealers against eligible collateral to address the shortage of liquidity in the system, he added.
“To implement its monetary policy, the SBP operationally focuses on controlling the short-term interbank interest rate – the overnight money market repo rate – through the use of various monetary policy (OMO, interest rate corridor, reserve requirements, foreign exchange swaps, etc.) ” It said.
Short-term rates translate into other longer-term market interest rates, such as the Karachi Interbank Offered Rate (KIBOR), which are used as a benchmark for business and household loans. In the transmission mechanism, efficient financial markets increase the efficiency and effectiveness of monetary policy transmission by reducing various uncertainties and improving the conversion of short-term interest rates into longer-term loan pricing .
Banks typically use funds generated from OMOs to invest in government securities.
Analysts had expected the SBP to provide banks with liquidity for two months to drive down yields on Treasuries, which hit 24-year highs at an auction on Wednesday. Cut-off yields on six-month paper soared to 15%.
The government has also increased the rate of return on Pakistan’s investment bonds to 13%.
The government sells bonds and bills at higher yields as its financing needs increase. Rising interest rates are unlikely to help attract speculative capital inflows due to the falling rupiah, deteriorating external sector, political uncertainty in the country and rising interest rates. interest in the United States.
The increase in the yield of Treasury bills pushed the KIBOR to a 13-year high of 14.96%.