KARACHI, Jan 21: Managing the liquidity through open market operations (OMOs) has become a regular feature of the State Bank. This creates instability instead of ensuring smooth functioning of the monetary policy.

As the date for the announcement of the revised monetary policy draws closer, the State Bank started entering the market more frequently but with milder impact on the overnight rate. The Bank is conducting OMOs on almost every second day to manage liquidity.

Since January 3, the SBP conducted nine OMOs, injecting Rs90.6 billion and sucking up Rs35.2 billion. The frequent entry by the SBP surprised even the money dealers who failed to understand the strategy.

The SBP used to pick up liquidity from a relaxed market and as the overnight rates started to slide. Its frequent interventions make the policy rather directionless.

“The SBP has a discount window and the dealers should be asked to get money from the discount window, instead of the SBP entering itself and bringing money to the market,” said a money dealer. He said it is surprising that the SBP do not want to utilize discount window, while discount rate is as high as nine per cent.

If the SBP wants to keep the overnight rates below than the discount rate, it should not pick up the excess liquidity from the system.

Despite frequent interventions by the SBP, the overnight rates have been witnessing wild fluctuations providing opportunity to big market players to profit from them.

There was a consensus among the money dealers and analysts that the SBP’s OMOs could not bring stability in the rates, rather it encouraged destabilization. They said that some big banks have developed skills of profiteering from the fluctuations in the money rates and others have to lose.

They said the State Bank has no target for overnight rates which should be adopted for the stability in the market. The policy of managing liquidity through the OMOs shows that the SBP is entering into the market without any specific target as some time OMO brings overnight rates down and some time it pushes the rates up.

Few analysts said that the SBP should adopt the methodology of central banks in many countries like USA and India. The Federal Reserves of United States and Reserves Bank of India enter into the market on daily basis to keep the overnight rates stable. They work both ways as they offer and bid at the same time to keep the overnight rates as per the target. The target rates are disclosed to the market.

“To bring stability and get rid-off the unexpected entry of the SBP, it is better to adopt the methods being used in USA and India,” suggested an analyst.

The SBP conducted OMO on Saturday and injected Rs20 billion into the market but it failed to bring any change in the tight liquidity position as the overnight rate remained at the top despite the big injection. The overnight rate closed at 8.9 per cent, just close to 9 per cent discount rate.

The interbank money market faced further hike as the overnight repo increased to 9.5 per cent. The money was injected for 3 days at a rate of 8.05 per cent.

Market analysts were of the view that the money market could be assessed in real term after the announcement of the revised monetary policy scheduled for Jan 26, 2006. This will be the first monetary policy under the newly appointed SBP Governor Dr Shamshad Akhtar. She has already hinted that the tight monetary policy would be continued with some adjustments, if required.

Analysts said that the new governor might bring some changes in the policy to feel her presence in the monetary issues, the most important subject of the central bank.