Central bank injects Rs. 1.69 trillion into money market system

In a bid to address the shortage of liquidity in the money market system, the State Bank of Pakistan on Friday injected a whopping Rs. 1.69 trillion into the money market system through the open market operation – a tool used by a central bank to inject funds according to the liquidity needs of a bank or a group of banks.

The money was injected into the market for a period of seven days and the banks are required to repay the capital with an annual interest of 12.29%.

According to sources familiar with the matter, under the terms of the International Monetary Fund (IMF) program, the central bank cannot lend money to the government. Therefore, the banking regulator indirectly funds the government through commercial banks.

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Abdul Rehman Siddiqui, Deputy Director of Research at BMA Capital Management System, pointed out that “this [large OMO] is due to the reduction of NFA [net foreign assets] of the banking system. The government must resort to OMO since SBP borrowing is prohibited under the IMF program,”

Analysts also speculate that commercial banks borrowing money from the central bank acquire it at a cheaper rate and invest in short-term paper at comparatively higher rates. Fahad Rauf, head of research at Ismail Iqbal Securities, says the increase in open market trading primarily indicates the need for “government funding” as eventually all capital is spent on “purchasing government securities “.

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It should be mentioned that many financial analysts believe that central banks regularly inject funds into the short-term money market in order to maintain key rates and avoid any financial crisis. The State Bank of Pakistan on Thursday raised its key rate by 250 basis points to 12.25%.

Previously, the central bank injected Rs. 3.37 trillion into the money market on April 11 for a period of seven days.

Noting the deployment of excessive amounts of capital in the money market, Ahmed Ali Siddiqui, Head of Shariah Compliance at Meezan Bank, said: public titles. So to cover that, the SBP provided them with cash.”

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Meanwhile, the country’s total liquid foreign exchange reserves as of April 8 stood at $17.03 billion.