KARACHI: The State Bank of Pakistan conducted a four day Open Market Operation (OMO) to mop up liquidity.
The SBP picked up Rs392.6 billion at a rate of return of 13.65 percent per annum. All twelve quotes were accepted.
OMO mop ups are done when there is excess liquidity in the banking system. The SBP balances it out by conducting a mop up by essentially borrowing from banks.
Fahad Rauf, head of research at Ismail Iqbal Securities explains that the SBP is conducting a mop up operation because, “There is excess liquidity because banks do not have other avenues to invest.”
Repo/ Reverse Repo auctions or OMOs are done to either inject or absorb market liquidity. The tenure of the auction is also determined based on the availability of the market liquidity.
Rauf explains that this is primarily due to the macroeconomic environment. “Banks are hesitant to lend. On the other hand, their participation in treasury bills is already hitting the roof with bids of Rs1.7 trillion being put in just yesterday,” he says.
Rauf adds the excess liquidity could be due to the refunds processed through banks. He says, “The finance minister has quoted that they have cleared refunds. That too could have increased the bank’s liquidity today.”
The government was able to raise Rs1.74 trillion from primary dealers through the auction conducted through the sale of 3, 6, and 12 month government security papers; against a target of Rs 800 bm.
However, this mopping up of extra liquidity is not the best channel of investment for banks. Rauf points out, “considering the floor rate of 12.75 percent, banks are getting a decent return. However, compared to other investment avenues like treasury bills where they’re getting an upwards of 15 percent, and loans where they get a return greater than the KIBOR, 13.65% seems underwhelming.”
It is interesting to note that, while there is excess liquidity, the SBP conducted an OMO injection pushing liquidity into the system a week ago. On June 24, the SBP announced a 77-day OMO injection into the interbank. Rs402 billion was injected through this OMO expected to mature on September 9, 2022.
This signifies that the monetary policy rate is likely to remain unchanged till the OMO matures in September. The SBP has already locked-in 94% of outstanding OMOs worth Rs4.1 trillion in 63 day tenors.
