SBP Injects Rs. 1.8 Trillion into Market to Manage Liquidity

After a gap of just 4 days, the State Bank of Pakistan (SBP) again conducted an Open Market Operation (OMO) on Friday by injecting Rs. 1.8 trillion at a rate of 17.25 percent for a 7-day tenor.

To recall, SBP last injected Rs. 125.6 billion at a rate of 17.08 percent on February 20, 2023, for 4 days. Similarly, it also conducted such short-term OMO injections on February 7, 2023, January 24, 2023, January 20, 2023, and January 3, 2023, by injecting Rs. 17.95 billion, Rs. 36.5 billion, Rs. 1 trillion, and Rs. 350 million, respectively.

Normally, SBP conducts a short-duration OMO of seven days. This 7-day OMO after just 4 days of the previous one provides banks liquidity for the short-term as it struggles to stabilize rates in the money market.

Essentially, an OMO is a tool used by SBP to inject or mop up funds, based on the liquidity requirements, from the banking system via the purchase or sale of eligible securities. Today’s injection comes after the government on Wednesday raised Rs. 258 billion ($991.54 million) in its latest treasury bill (T-Bill) auction. The cut-off rates for the three-month, six-month, and 12-month tenors jumped 195 bps, 206 bps, and 184 bps higher than the previous auction, effectively bypassing the central bank in order to meet the conditions of the International Monetary Fund.

Operationally, in the case of OMO (injections), SBP lends funds to banks against eligible collateral to address the liquidity shortage in the system, but Wednesday’s exorbitant T-Bill yields show the shortage might persist without a Monetary Policy rate hike in the central bank’s upcoming market review on 16 March.

In May 2022, the central bank during a post-Monetary Policy Announcement briefing stated that it can use various monetary policy tools to bring stability to secondary market yields. The OMO tool was once considered a long-term solution to address liquidity issues but with this year’s inflation and across-the-board money crunch, it isn’t having the desired effect. 2023’s second policy meeting is too far in the future. Given the circumstances, it has already been factored in with Wednesday’s T-Bill auction.

Secondary market yields will continue to rise until more comprehensive and policy-focused tools are implemented to address the ongoing liquidity crisis. If the SBP raises the policy rate to at least 19 percent, the number of OMO injections may decrease. Lending rates will fall to a more stable level in this case.

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