In its weekly implementation of open market operations, the Central Bank of Iran conducted reverse repurchase agreement (reverse repo) operation for the first time.
While the CBI has mainly focused on repo operations to inject money into the interbank market when implementing the monetary policy, the bank has done the opposite in the past three weeks by conducting the reverse repo, trying to absorb excess banks’ liquidity at the interbank market.
As a component of open market operation, repo is a form of short-term borrowing for dealers in government bonds. In the case of repo, a dealer sells government securities to investors, usually with short-term maturities, and buys it back at the maturity date at a slightly higher price.
A reverse repo is a short-term agreement to purchase securities mainly to sell them back at a slightly higher price. Repos are typically used to raise short-term capital.
Under reverse repo, the CBI sold bonds worth 63.7 trillion rials ($276 million) to banks at 18%. The bonds will mature in seven days, according to a press release published by the CBI’s data.
The CBI’s monetary policy is directed toward the contraction of money supply at the interbank market over the past three weeks, a move that has apparently caused interbank interest rates to decline.
The Interbank interest rate has reached its lowest in the past nine months. With CBI’s contractionary policy continuing, the interbank rates are expected to decline further.
Interest rates have been on a steady decline at the interbank market in recent months to reach 18.49% as of June 3. That was down from 19.24% registered almost a week before. Prior to that interbank rate vacillated between 19.56-19.9% from mid-February to mid-May.
As seen with the past two weeks, the CBI refused to give the so-called “structured loans” to applicant banks during OMO implementation this week, perceiving that they have sufficient liquidity. This normally causes banks to lend credits to each other at rates below the interest rate ceiling, a phenomenon seen as the main reason behind the decline in the interest rate at the interbank market.
