The Central Bank of Iran says it has conducted the first repurchase agreement (repo) operation to implement the open market operation to regulate interbank interest rates.
Repo is a form of short-term borrowing for dealers in government bonds. In case of a repo, a dealer sells government securities to investors, usually on an overnight basis, and buys it back the following day at a slightly higher price. Repos are typically used to raise short-term capital.
In a notice posted on its website, the CBI said it has agreed to lenders’ request for short-term credit worth 8.9 trillion rials ($30 million) under repo, marking the first operation of its kind in CBI’s history. The repo operation was conducted at 22%, the highest interbank interest rate.
“Launching the first repo operation is in line with government decisions to expand the OMO and President Hassan Rouhani’s emphasis on letting the market decide interbank rates,” the CBI said.
In a meeting with senior economic officials on Sunday, Rouhani called on the CBI to avoid a prescriptive approach in determining rates in the interbank market, underlining the role of OMOs and other relevant monetary policy instruments in guiding the rates within the market mechanism.
Earlier in the week the CBI said interbank interest rates have increased steadily in recent months after dropping as low as 10% in June.
Average interest rate in the interbank market reached 14.8% in the fifth month of the fiscal year to August 21. It further increased by 17.2% on average next month. The CBI raised the lower bound of interest rate corridor (IRC) in the interbank market to 14% in August. The upper bound now is 22%.
Under the IRC structure, the CBI sets the floor and ceiling of policy rates and lets other money market rates, such as interbank rate, move within this setup.
Two Components
The OMO and IRC are the main components of the central bank’s new monetary policy announced in January. OMO is a financial instrument through which central banks buy and sell securities in the open market to expand or reduce money supply.
Within this framework, central banks can buy government bonds to increase the money base (cash reserves) and curb inter-banking lending rates. By the same token, selling government bonds reduces the money base and raises interbank rates.
CBI has asked lenders to allocate a portion of their assets to buy bonds. “Given that in the new framework the CBI manages liquidity of banks and non-bank credit institutions based on Islamic bonds… they need to allocate a portion of their assets to [buying] bonds,” the CBI said.
The bank has launched 20 weekly bond auctions since May to expand the debt market and raise funds to plug the government’s budget deficits.
