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SBP injects Rs604 billion via a 63-day OMO

KARACHI: The State Bank of Pakistan (SBP) on Friday conducted its third open market operation (OMO) in as many weeks, injecting cash into the money market for an exceptional 63-day period.

In comparison to the proposed sum of Rs963 billion, the SBP gave banks only Rs604 billion in liquidity. The OMO, a mechanism that the central bank employs to manage the short-term cost of money by exchanging government debt securities with commercial banks, injected Rs330 billion at 9.87 percent for seven days and provided Rs274 billion at 9.88 percent for 63 days.

Also read: The SBP Amendment Bill has been approved by the Cabinet

The latest OMO follows the two OMOs held on Dec 24 and Dec 17 in which the SBP lent banks a total of Rs2.85 trillion for seven- and 63-day tenors. The move is aimed at bringing down the yields on treasury bills that have risen despite the SBP’s forward guidance suggesting no change in the benchmark interest rate in the immediate term.

“The objective is to minimise the banks’ repricing risk. Their cost of funds is fixed for the next two months, which should enco­urage them to bid for treasury bills at lower rates in the coming auctions,” said Ismail Iqbal, Securities Head of Research Fahad Rauf

Although banks were provided with ample liquidity ahead of the last auction of treasury bills on Dec 29, the cut-off yield on the three-month paper came down by only 19 basis points from the preceding auction — a drop that was smaller than what most money market analysts expected.

While the SBP never states categorically that it’s injecting cash into the money market to boost banks’ participation in government debt auctions, it’s the implicit objective of the OMOs of unusually longer tenors. “It’s true that the yields didn’t record big declines in the last auction. One reason was the sharp increase in the international oil price, which made banks concerned about a rise in the import bill and its effects on the exchange and interest rates,” said Mr Rauf.

Also read: SBP injects Rs382 billion for next 63 days

Cash that banks received through the latest OMO of 63 days will remain available with them for the next two months at a fixed cost. This means they’ll have the liquidity to actively take part in the treasury bill auctions scheduled for Jan 12, Jan 26, Feb 9 and Feb 23 at relatively lower rates, he said.

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