Interbank rates continue to rise climbing to 20.31% as of Thursday, the Central Bank of Iran said.
Rates have been of the ascending order since late August rising from 18.29% and now are the highest since the beginning of the current fiscal year in March.
It was 19.9% in late March before declining to 17.95% on July 8, the lowest this year. Since then the rates have risen steadily. The decline in the first few months was linked largely to liquidity surplus in the interbank market.
Incessant upsurge in rates apparently suggests a pattern of liquidity crunch and the CBI’s expansionary policy has done little if anything to curb it.
To quench the thirst for liquidity in the interbank market, the CBI has regularly injected funds by implementing open market operations.
The regulator made history last week when it pumped 302 trillion rials ($1.1 billion) into 13 banks in the interbank market by implementing the repurchase agreement (repo).
As a component of OMOs, the repo is a form of short-term borrowing for dealers in government bonds. In case of a repo, a dealer sells government securities to buyers, usually with short-term maturities and buys it back the at the maturity date at a slightly higher price. The maturity date in Iran’s interbank market is usually seven days.
The CBI also gave 191.1 trillion rials ($707m) to 11 lenders under the “structured lending” framework in which banks put up government bonds as collateral with the CBI to borrow.
Banks in critical need for credit borrow at 22% from the CBI, which is the upper bound of interest rate corridor (IRC). Banks with surplus credit deposit cash with the CBI at 14%, the lower bound of the IRC.
Increase in interbank rates normally tend to agitate investors in the domestic asset markets. Particularly, the stock market has proven to be highly sensitive to interbank rates and financial experts see a correlation between share prices and interbank rates. As such, lower rates make investment in shares appealing while higher rates have the opposite effect.
Market observers say the sharp decline in interbank rates early last year was sent a “positive signal to the stock market” and was fundamental to the exit of liquidity from banks to the bourse.
As per CBI data, the average interbank rate dropped to 11.71% in May 2020 from 16.68% a month earlier. It further fell to 9.72% in the month to June 22. This coincided with the unprecedented bullish trend in the share market as the bubble burst.
Rates moved upward since then to reach 14.79% in the month to July 22 before rising further to 19.97% and reaching 22.63% by mid-October before declining again.
Capital market officials have always called on the CBI to regulate interbank rates and bond yields to levels that won’t undermine the bourse.
