KARACHI, March 19: The State Bank of Pakistan injected a huge liquidity on Wednesday to soften the dry inter-bank money market which kept the rates just close to the discount rate for more than a week.

The SBP injected Rs33.75 billion through open market operation for three days.

Dealers said that the money market was under the grip of liquidity crunch and the Karachi Inter-Bank offered rate was undesirably higher than the discount rate.

The SBP, which has been maintaining a tight monetary policy for the last two years, kept sweeping out liquidity from the market.

Money dealers said that for more than a week banks were forced to borrow from the discount window of the SBP which lends banks at the rate of 10.5 per cent. The overnight rate slipped to 10 per cent after the injection by the SBP.

Bankers said that shortage of liquidity was not because of higher advances being made by banks to the private sector, it was only because of cautious policy of the SBP which wants to hold a tight grip over inflation.

Higher supply of liquidity or presence of ample liquidity leads to inflation. Despite this tight policy, the SBP data shows that currency supply was much higher during the last eight months, compared to the corresponding period last year.

The currency supply in the last eight months increased by 50 per cent, and from July to March 8, it was to the tune of Rs177 billion against Rs118

billion in the corresponding period last year.

However, the dry money market delivered desired results to the SBP in terms of low supply of credit to the private sector. The credit growth regarding the private sector has been slower than its growth two years back.

Till March 8, the SBP data shows that the credit growth was 21 per cent to stay at Rs292 billion, compared to Rs240 billion during eight months of last year.

Bankers have been saying that low credit supply to an economy which has been set to grow at seven per cent is against the demand. The growing economy demands higher supply of money.

They said the economy took a sharp jump when the SBP cut the interest to as low as two per cent five years back.

The huge money was pumped into the economy which attained the growth of average seven per cent.

“Both the monetary growth (M2) and Reserve Money (RM) are lower than last year’s, showing effectiveness of the SBP’s tight monetary policy,” said a senior banker.

He, however, said the policy did not work in two directions. First, it failed to control the main inflation, and secondly, it did not help in expansion of economy.