KARACHI, April 11: The State Bank on Thursday injected Rs6.3 billion into cash-strapped money market to keep interest rates stable.

Bankers said the SBP made the injection by purchasing treasury bills under reverse repo arrangement at 6.5 per cent. The SBP had pumped in Rs700 million on Monday under the same arrangement — and at the same rate.

Bankers said the injection came as a big relief to the market that had discounted by Rs2.2 billion on Wednesday. That is some banks had to borrow Rs2.2 billion from the State Bank against approved securities to square their liquidity position at the end of the day. “Had there been no injection today the market would have resorted to even more discounting,” said treasurer of a big bank. He said the injection brought the overnight call rate down by 4-7.5 per cent on Thursday from 8-8.90 per cent on Wednesday.

Senior bankers said they were expecting the market to discount heavily on Thursday ahead of reserve averaging on Friday, adding that Rs6.3 billion would more or less enable the banks to average out their reserve requirements on Friday. Some of them said the market might seen a modest discounting on Friday even after this injection.

Banks are bound to keep five per cent of their deposits as cash reserves with the SBP on weekly basis but they are allowed to let the amount fall to four per cent on any given day. Since most banks keep their daily reserves at four per cent they have to raise it to five per cent on Friday — the last working day for this purpose. This is called reserve averaging.

Senior bankers said that Rs6.3 billion injection reinforced earlier by the SBP signalled that it wanted stability in interest rates.

“The SBP wants to keep the inter-bank market slightly liquid to maintain the present level of T-bills rates in the next auction,” said treasurer of a local bank.

In the last auction of T-bills the central bank had increased the cut-off yield of six-month bills by only four basis points to 6.48 per cent signalling to the markets that it wanted stability in interest rates. The two injections made this week shows that the SBP wants to maintain the cut-off around the same level. That seems quite logical in the backdrop of a recent shift in the SBP monetary policy. The State Bank had started easing of the policy since July and continued this process till February last when it halted rapid cuts in its discount rate and held it firm at nine per cent.

Since then the central bank has made deliberate moves to keep the stance of the monetary policy unchanged signalling that further rate-cuts are off the table. More importantly the State Bank let the T-bills weighted average rates inch up last month that resulted in a 50 basis points increase in the export finance rate for April 2002.

But in doing so the central bank did not allow any significant increase in the T-bills cut-offs or the maximum yield they offer thus further consolidating the signal for a stable interest rate regime.

The fact that the SBP has so far made two injections totalling Rs7 billion during this week against total discounting of Rs4.8 billion that shows that the central bank is quite serious in keeping the inter-bank market reasonably liquid in the days to come.