KARACHI: In an unusual open market operation (OMO) that included the injection of liquidity for a 63-day period, the State Bank of Pakistan (SBP) provided the money market with total funds of Rs1.77 trillion on Friday.

The central bank buys and sells government debt papers almost every week to control short-term interest rates in the money market. However, funds injection through liquid assets for a tenor of more than two months is out of the ordinary given that OMOs are typically held for much shorter tenors.

“Yields in the secondary market had become too unrealistic. The SBP has injected liquidity for a longer period to give confidence to the market that the policy rate isn’t going up anytime soon,” said Samiullah Tariq, head of research at Pak-Kuwait Investment Company, while speaking to Dawn.

Yields on treasury bills in the secondary market should typically be 20-25 basis points higher than the benchmark interest rate. However, they significantly exceeded the policy rate of 9.75pc in spite of the SBP’s unambiguous “forward guidance” that no rate hike was expected in the short run.

In the latest OMO, the SBP injected Rs1.09 billion at 9.82pc for seven days and Rs689bn at 9.9pc for 63 days. The regulator’s move bore fruit immediately. Interest rates in the money market came down by 34-40 basis points to 10.27pc and 11.07pc for three-month and six-month papers, respectively, according to a research note by Topline Securities.

Central bank conducts unusual 63-day open market operation, injects Rs1.77tr into banking system through two OMOs

Similarly, Pakistan Investment Bonds also witnessed a fall in yields by 10-13 basis points on their three- and five-year papers to 11.53pc and 11.58pc, respectively.

The latest OMO is the manifestation of the SBP’s forward guidance, said Mr Tariq, as banks can keep this liquidity for an extended period of time without having to worry about an interest rate hike.

In its monetary policy statement on Dec 14, the SBP had called the significant rise in secondary market yields unwarranted. But the yields stayed at the same elevated level in the subsequent auction of treasury bills on Dec 15. In fact, yields on the same instruments in the secondary market further rose by 20-30 basis points following the Dec 15 auction.

“Banks tried to extract maximum benefit for themselves. The government had to borrow in the last auction to meet its rollover target. But the next auction will likely be at a lower rate,” he said about the Dec 29 auction of treasury bills.

Meanwhile, SBP Governor Reza Baqir told Bloomberg TV on Friday the central bank will “take a pause” before going for any further hikes in the key interest rate.

The SBP has increased the policy rate by a total of 275 basis points in three steps since September to control inflation. It resulted in the depreciation of the rupee that, according to Bloomberg, has been the worst performer for the past six months among 13 Asian currencies.

The dollar closed at Rs178.04 in the interbank market on Friday, which shows the rupee lost 1.46pc from the beginning of December when the parity stood at Rs175.47.

Published in Dawn, December 18th, 2021