KARACHI, April 6: The inter-bank money market braved a serious liquidity crisis this week as the State Bank started returning to the banks some foreign currency deposits.

Bankers said more than Rs25 billion discounting took place in the week ending on April 6 as traditionally liquid major banks stopped lending into the market. They said the liquidity dried up as the SBP started returning to banks from $318 million foreign currency deposits that they had attracted as incremental deposits in the $11 billion foreign currency deposits frozen on May 28 1998. Bankers explained that as the State Bank is returning these deposits to the banks it is getting their rupee equivalent in return thus leaving the inter-bank money market poorer. Senior bankers said transfer of taxes collected by banks at the end of March to the State Bank also left the market short of liquidity.

Senior executive of a state-run bank said that a huge dividend payment by Oil & Gas Development Company to the government account and another lumpy transfer of money from National Bank to National Development Finance Corporation (NDFC) also siphoned off enough liquidity from the market. Bankers said the State Bank is likely to reimburse the payment that NBP has made to NDFC thereby easing the liquidity crisis to some extent. The liquidity crisis was so acute throughout this week that call rates remained ranged bound between 7.50-8.90 per cent for the better part of the week. They said that the rate was oscillating between 8.00-8.90 per cent on Saturday.

Senior bankers said the SBP might continue to keep the inter- bank money market stable — or even a bit tighter — in the days to come to keep the lending rates stable. Vast and wild fluctuations in the inter-bank lending rates normally leave the banks confused and they cannot respond quickly to the changes in the monetary policy. This partly explains the earlier reluctance shown by some major banks in reducing their lending rates in line with the fall in SBP discount rate and treasury bills rate.

A stable inter-bank money market is also helpful in containing volatility in foreign exchange rates. That is why central bankers are apparently focusing on stability of the inter-bank money market. Though the rupee has risen by more than 6 per cent against the dollar in the first nine months of this fiscal year (July 2001 through March 2002) the central bank cannot afford to allow volatility in exchange rate regime that could be detrimental to the confidence of the exporters and investors.