The interbank interest rate declined for the second straight week after reaching the one-year high of 21.11% on Dec. 30.
Stepping back from the recent highs, the interbank rate declined to 20.5% this week -- the lowest since Oct. 28, according to Central Bank of Iran data.
Interbank rates are interest charged on short-term lending between banks. Banks borrow money from each other to ensure that they have enough liquidity for immediate needs, or lend money when they have excess cash on hand.
The CBI in recent weeks has been struggling to curb the growth in interbank rates by injecting funds in the interbank market, driven by concerns that high interbank rates may negatively impact investment in stocks.
To tame the rates, the CBI has adopted expansionary policies in the interbank market via its open market operations.
It injected an unprecedented 750 trillion rials ($2.7 billion) into banks in dire need of liquidity via the repurchase agreement (repo).
As a component of OMO, repo is a form of short-term borrowing for dealers in government bonds. In a repo, a dealer sells government securities to buyers, usually with short-term maturity and buys it back at the maturity date at a slightly higher price. The maturity date in Iran’s interbank market is usually seven days.
In addition, lenders borrowed 12.5 trillion rials ($46 million) under the “structured lending” framework, in which banks put up government bonds as collateral with the CBI to borrow.
The interbank rate was 19.9% in late March before declining to 17.95% on July 8, the lowest in the present fiscal year. Since then rates began to rise steadily reaching 21.11% in late December.
Financial markets are almost always impacted by fluctuations in interbank rates. In particular, the share market has shown added sensitivity to interbank rates and financial experts see a positive correlation between share prices and interbank rates. As such, lower rates make investment in shares attractive while higher rates have the opposite effect.
The CBI is under mounting pressure to do what is needed to lift the long-limping share market when crafting its monetary policies. In one of the ten supportive measures announced by the government in December to revive the stock market, the CBI is obliged to “actively intervene” in the interbank market and navigate average borrowing rates in the 20% region.
Market experts say the sharp decline in interbank rates in the first quarter of last fiscal year was a “positive signal to the stock market” and the main cause behind the departure of liquidity from banks to the bourse.
As per CBI reports, average interbank rate dropped to 11.71% in May 2020 from 16.68% a month earlier. It further plunged to 9.72% in the month to June 22. This coincided with the unprecedented bullish trend in the bourse and the price bubble burst a month later.
