KARACHI, Jan 27: The State Bank on Thursday pumped in Rs11.9 billion into cash-stripped inter-bank market for one week by purchasing treasury bills at 5.85 per cent.

The central bank did this through reverse repo arrangement which means that after a week it resell the bills and drain out Rs11.9bn from the banking system again. Bankers said banks were interested in selling Rs23.9 billion treasury bills for one week to overcome the shortage of cash but the central bank bought Rs11.9 billion worth of bills.

That was why the market was short of cash even after the injection of funds by the central bank -- and overnight lending rate stood at 7.4 per cent, closer to SBP discount rate of 7.5 per cent.

The SBP discount rate is the rate at which banks can borrow funds for up to three days against government securities to overcome temporary cash shortages. Banks ran short of cash this month primarily due to deposit withdrawals for spending on Eidul Azha.

So acute was the cash shortage that they had to borrow overnight funds from the SBP discount window most of the time during this month. The daily average of such borrowing, or discounting, comes to Rs4.6 billion.

The central bank did not take much notice of this liquidity crisis because it helped in keeping the rupee stable. It, however, injected Rs21 billion funds into the inter-bank market on two occasions, including Rs11.9 billion injection on Thursday.

Shortage of rupee funds into the market prompted the banks with dollar holdings to sell the same to generate rupees. This raised the rupee value to 59.26 a dollar on Wednesday, up from 59.43 at the end of last month.

The injection of Rs11.9 billion cash into the inter-bank market, however, halted the rise of the rupee for the time being and it fell to 59.29 a dollar. Bankers say the inter-bank market may have to face cash shortage until mid-February when Rs90 billion of inflow is due through maturity of treasury bills.

Whether the SBP will let the market remain short of liquidity till that time or pump in more money to ease off the crisis depends on how other factors impact on the exchange rate movements.

If the rupee remains stable, the central bank should not mind injecting funds to keep the banking system reasonably liquid. But if it shows signs of weakness, the SBP will have to keep the system short of cash.

Since the central bank is also fighting inflation through interest rates hikes that requires it not to let the banking system wallow in rupee funds, it may avoid injecting cash even if the rupee weakens slightly due to such factors as a widening trade deficit.