The Central Bank of Iran’s injection of funds in the interbank market under open market operation (OMO) has reached unprecedented levels this week.
Under CBI’s expansionary policy to control interbank interest rate, the regulator injected a total of 950 trillion rials ($3.6 billion) into banks in dire need of liquidity in the previous Iranian week.
CBI conducted the repurchase agreement (repo) and gave 840.6 trillion rials ($3.2 billion) to lenders who had sought short-term liquidity, according to data published on its website.
The bank said it had received 22 requests from banks wanting to sell government bonds to CBI under the repo mechanism.
As a component of open market operation, 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 with short-term maturities, and buys it back at the maturity date at slightly higher price. The maturity period is normally seven days in the Iranian banking system.
According to data compiled by the Persian economic website Eqtesad News, CBI made history by injecting money at this scale under the repo mechanism last week.
The bank has injected on average 831 trillion rials ($3.1b) per week into the interbank market over the past month, indicating the insatiable thirst of banks for liquidity.
Within the OMO framework, central banks buy government bonds to increase the money base (cash reserves) and curb inter-banking lending rates. By the same token, the sale of government bonds reduces the money base and raises interbank rates.
Apart from regulating the interbank interest rate, using bonds as collateral to borrow from CBI is also a key element of OMO.
CBI said that it has given 97.5 trillion rials ($375 million) to three banks under the so-called “structured lending”, a process through which banks put up bonds as collateral with CBI to borrow money.
Structured lending last week hit the highest in the past four months.
CBI has managed to control the rising trend of interbank interest rate by expanding money supply in the interbank market.
The interbank interest rate presently stands at 20.33%, down from the one-year high of 21.11% on Dec. 30.
Interbank rates are interest charged on short-term lending between banks.
Higher interbank rates tend to negatively impact investment in asset markets, namely the share market.
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 10 supportive measures announced by the government in December to revive the stock market, CBI is obliged to “actively intervene” in the interbank market and navigate average borrowing rates in the 20% region.
Monetary Concerns
Banks’ excessive borrowing from the CBI has drawn new concerns about its detrimental impact on monetary base. In a report published earlier by CBI, the bank said monetary base grew 37.6% in the 12 months ending Dec. 31.
The growth was up 22.2% over nine months since the beginning of the current fiscal year that ends on March 20, which is 6.7 percentage points higher compared with the corresponding period of last year. This is apparently driven by the deep liquidity crunch in the interbank market that has given rise to banks’ monumental debt to CBI.
The bank said such lending practices explain the 12.8 percentage points and 8 percentage points of monetary base growth, respectively, in the past 12 and nine months.
Shortage of liquidity in banks is linked to the exploding government budget deficits and obligations imposed by it on banks to lend to help stimulate the economy.
Censuring the mounting pressure on banks to lend, former CBI governor, Abdolnasser Hemmati, described the practice as an “indirect borrowing by the government from CBI”.
In a post on his social media account earlier last month, Hemmati said, “Lenders buy government bonds only to sell to CBI under the repo mechanism to borrow.”
