KARACHI, Oct 7: Severe liquidity crunch on Friday compelled banks to go for heavy discounting from the State Bank to meet their liquidity requirement on the last day of cash reserves settlement with the central bank.

Bankers said that the huge liquidity outflow from the banking system, which pushed the inter-bank money rates to the highest level, had created necessity for reverse repo.

The inter-bank money market was facing an acute shortage of liquidity mainly on account of heavy withdrawal from banks just before Ramazan. The bankers estimate that billions of rupees were withdrawn from the deposits, leaving the bank short of liquidity. No figures were available with banks as to how much money was withdrawn before Ramazan to avoid Zakat deduction.

The banks raised Rs35.5 billion through discount window to settle their cash reserves requirement with the State Bank. They raised Rs13.5 billion on Wednesday through discount window.

The shortage of liquidity pushed the overnight rate to the highest level of 8.9 per cent, just below the discount rate of nine per cent. The bankers said that there was a dearth of liquidity in the banking system which forced the banks to go for State Bank’s help.

They pointed out that the demand for cash money was on high because of Ramazan and it would continue for the whole month. “Cash withdrawal by the general public may continue and the market expects more withdrawal and more discounting in future.”

“Liquidity crunch may continue for another couple of weeks or a month,” said Ali Shoeb, an analyst at a brokerage house. He said the market was short of liquidity and there was a need for the State Bank to come into action.

“We hope that the State Bank would conduct an open market operation on Monday to inject significant liquidity into the system,” said Mr Shoeb.

The State Bank has been maintaining a tight liquidity system to keep checks on unwanted increase in inflation, but the tight liquidity position pushed interest rates higher. Bankers and analysts say if the present scarcity continues, the interest rates would witness a substantial increase.

The bankers said the market was short of Rs40 billion and the State Bank would have to inject an amount not less than Rs20 billion to cool down the heated money rates.

Exchange companies said that foreign currency holders were in queue to get Pakistani rupees, which also caused a significant outflow of liquidity from the banking system. They said Ramazan would receive bigger inflows of remittances from overseas Pakistanis and this foreign exchange would be converted into Pakistani rupees again, resulting in outflow from the banking system.

“Rush of sellers is so big that sometime we fail to meet the cash demand and have to wait for another supply from banks to liquidate the foreign currency mainly dominated by the US dollars,” said Amir Ali, a currency dealer at an exchange company.

“Saudi riyal is the only currency we are selling at the moment because of Hajj,” he said, adding that 70 per cent of public coming to him were sellers.