January 10, 2006	Tuesday	Zilhaj 9, 1426

KARACHI, Jan 9: Money market rates once again hit the highest level on Monday, the last working day before Eid, mainly on account of huge outflow of liquidity and the State Bank’s forex selling and buying in the market.

The scarcity of liquidity compelled the banks to approach the discount window of the SBP despite injection of a large amount of Rs18.1 billion on last Saturday.

Market sources said the money was traded at 8.9 per cent for overnight which was just close to the discount rate. Banks got help of Rs2.3 billion from the discount window on Monday.

Sources said that the outflow was more than the expectations of the banks which was certainly to the tune of several billion rupees. Bankers estimate that the outflow could be around Rs20 billion.

However, some analysts said that the scarcity was also due to SBP’s secret moves to buy or sell dollars in the market which either increase or suck up the liquidity.

The SBP used to buy dollars from the market and it operates through few top big banks while, most of the banks remain unaware about the SBP’s activity. The SBP also sells the greenback when demand goes higher and prices start rising.

“Most of the time small banks remain unaware about the dollar selling in the market which sucks up liquidity,” said an analyst.

Banks misread the development and failed to assess the actual demand of the liquidity which finally forced them to borrow from the State Bank.

The SBP used to disclose its dollars buying and selling in it’s annul report. Bankers said that the SBP has been buying dollars for more than a year because higher oil bills and widening of trade deficit. The SBP wants to keep a substantial amount of dollars in the reserves but it has been declining fast and its own reserves witnessed a fall of over $1.3 billion in one year.

Bankers said that the presence of higher liquidity also tends to heat up the dollars market as demand goes higher. However, the most concerning issue for SBP is inflation which rises with the growth in liquidity. The SBP has been maintaining tight monetary policy to control the excess liquidity and last week conducted Open Market Operations to suck up liquidity despite knowing the higher demand due to Eid.

“The SBP does not want to take risk and conducted OMOs but it had to inject over Rs18 billion on Saturday to meet the market demand,” said the analyst.