State Bank rejects bids offered for OMO

KARACHI: The State Bank of Pakistan (SBP) on Monday rejected the bids which were offered for a 74-day reverse repo purchase (injection) during its open market operation.

The offered amount for this OMO was Rs1.910 trillion. The central bank also rejected bids for the Shariah-compliant Mudarabah-based OMO. For this, the offered amount was Rs96 billion.

Analysts said the reason for the rejection of the bids for both conventional and Islamic OMOs was higher than expected participation. Therefore, the SBP did not accept the bids. The SBP conducts long-duration OMOs to ease the liquidity constraints of banks and calm the money market. This time it seems there was an excess liquidity in the system so the banks were also not in a hurry for funds.

“OMO is more of a liquidity plug for the markets. Don't think this signals interest rate direction,” said Saad Hashemy, executive director at BMA Capital Management. The SBP’s monetary policy review is due on Thursday. The central bank’s Monetary Policy Committee is expected to hike interest rates by 100-150 basis points to combat soaring inflation.

Consumer price index inflation rose 6 percent month-on-month to 21.3 percent in May. This took FY2022 inflation to 12.1 percent, the highest after FY2011 when inflation clocked in at 13.7 percent.

Fahad Rauf, head of research at Ismail Iqbal Securities, said SBP’s Monday gesture would create panic in the market, showing that the SBP was not sure about its decision. “Till morning, the market was sure that interest rates won’t go up as SBP is signalling repeatedly through long tenor OMOs, but now the market will doubt SBP’s intentions,” Rauf added.

He said from a logical perspective, interest rates should not increase further as the economy has already been slowing down. Inflation is cost-push. Interest rates would not have an impact on cost-push inflation, he added.

The SBP had been injecting funds into the money market by conducting long period OMOs, but excess liquidity still did not help in reducing cut-off yields. The yields slightly fell on three and six months papers in the last auction held on June 29.