SBP injects 675 billion rupees into banks


The State Bank of Pakistan (SBP) has injected more than 675 billion rupees into commercial and Sharia-compliant banks for 63 days, hinting that the benchmark interest rate will remain unchanged despite the surge in inflation in October.

The central bank injected the funds at a stable rate of return of 15.2%, before which the government would have to borrow from commercial banks to pay down maturing domestic debt and finance the budget deficit. The government will sell its debt securities, including treasury bills and Pakistan Investment Bonds (PIBs), to commercial banks to borrow the money.

Speaking to the Express Tribune, Head of Research at Ismail Iqbal Securities, Fahad Rauf said: “The injection of liquidity through the conduct of a 63-day open market operation (OMO) is primarily aimed to stabilize cut-off yields (loans from commercial banks, financing rates to the State) on Treasury bills and BIPs.

“The injections for a longer term at a stable rate of return signal to commercial and sharia-compliant banks that the central bank wants to keep its policy rate at the current level of 15%. This comes despite inflation rising to 26.6% in October from 23.2% in the previous month of September 2022,” he added. The policy rate is a tool available from central banks around the world to create a balance between inflation readings and economic growth.

“The rise in inflation in October should convince the central bank to raise its key rate in the next monetary policy announcement scheduled for November 25, 2022. The central bank will, however, maintain the key rate at 15%, as a further hike will hurt to economic growth in the current fiscal year of 2023,” Rauf explained.

Earlier, the central bank revised its economic growth projection to 2% for FY23 on October 10, 2022, from 3-4% the previous year due to recent floods that ruined agronomy worth over $30 billion. The country has achieved a growth rate of 6% consecutively in the past two years, i.e. FY21 and FY22.

“The SBP will not cut its key rate this month as central banks around the world have continued to raise their benchmark interest rates, including the US Federal Reserve and the Bank of England,” Rauf observed. .

The analyst recalled that cut-off yields on government debt securities fell slightly by the time Ishaq Dar became the new finance minister in September 2022 and have remained stable since then.

“Inflation readings will slow to around 23% in the current month of November once the government completes its electricity price adjustments,” Rauf predicted.

The Pakistani rupee stabilized in the interbank market on Friday, rising 0.01% (or Rs 0.03) to close at Rs 221.92 against the US dollar.

The rupiah managed to consolidate following the weakening of the US dollar against other world currencies, amid rising international oil prices.

Additionally, the 20% increase in the country’s foreign exchange reserves to around $9 billion in the week ended October 28, 2022, from a 40-month low of around $7.5 billion the previous week, also supported the rupee.

Over the previous two days (Wednesday and Thursday), the Rupee lost 0.59% (or Rs1.30) cumulatively.

Published in The Express Tribune, November 5e2022.

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