The rise in interbank rates paused after climbing for 14 consecutive weeks and hitting multi-month highs.
The rate dropped slightly to 21.13% from 21.31% last Saturday, which was the highest in 18 months.
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.
Though insignificant, the latest decline in interbank rates indicates the regulator’s determination to curb it following serious concern voiced by asset markets, namely investors in the share market.
The valid concerns were communicated to the Governor of Central Bank of Iran Ali Salehabadi this week by the head of the Securities and Exchange Organization, Majid Eshqi.
Salehabadi says the CBI will work to curb interbank rates in line with monetary policy. “There is a need to align monetary and financial policies,” he said.
Rise in interbank rates spurred concern about declining investment in the asset market. 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.
Observers say increase in interbank rates in the past was part of the CBI policy to tame runaway inflation. They criticize moves to cut rates only to rescue the struggling share market at the expense of imposing high and rising inflation.
Commenting on the issue, Kamran Nadri, an economist, said the recent rise in interbank rates was not big enough to negatively impact the bourse.
“Under the present conditions, the CBI must uphold monetary principles. This means controlling the monetary base by curbing money supply.”
Nadri says “If the CBI wants to scrap plans to control the monetary base, interbank rates will decline, but this is incompatible with anti-inflation policies”.
He urged the CBI to stick to its destined role, which is to control inflation instead of worrying about the unending volatility in the share market.
CBI Dilemma
The CBI is under mounting pressure to help revive the long-struggling share market when deciding monetary policy. In one of the ten supportive measures announced by the government last December to revive the bourse, the CBI is obliged to “effectively intervene” in the interbank market and navigate average borrowing rates in the 20% range.
The CBI earlier confirmed that interbank rates increased slightly in the first two months of fiscal 2022-23 as a result of its monetary policy to restrain liquidity in the interbank market.
The interbank market and banks saw excess of funds thanks to the deposition of cash by the government in the accounts of millions of needy constituencies after its decision to eliminate currency subsidy and pay cash.
Struggling to avoid steep decline in interbank rates due to excess funds, the CBI reduced supply of overnight credit to banks under repurchase agreement (repo) operation that pushed up the rates.
As a component of open market operations, 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 the at the maturity date at slightly higher price.
