Tehran Market Regains Calm After CBI’s New Forex Strategy

EghtesadOnline: Foreign exchange market showed early signs of cooling on Thursday after the Central Bank of Iran unveiled its emergency package aimed at enticing investors to embrace regulated monetary and gold markets as their preferred choice.

News ID: ۷۴۵۰۰۳

17 February 2018

The package approved by the government on Wednesday and later announced by CBI includes unusual measures to put a stop to a volatility that saw rial lose a quarter of its value in the past six months.

The package includes tightening of monetary policy, the issuance of rial-denominated foreign currency bonds and the presale of gold coins at prices lower than the market rates.

First and foremost, the regulator, in an about-face from its previous dovish policy, has allowed lenders to open one-year savings accounts with an interest rate of 20% for a period of two weeks from Saturday, Financial Tribune reported.

The temporary rate increase is aimed at creating a safer rival market for the more risky and fickle forex market, thereby shoring up the value of rial.

The bank had last ordered lenders to cut their deposit and lending rates to 15% and 18% respectively in September last year in response to the decline in inflation rate to single digits for the first time after a quarter century.

Some independent analyst had warned the bank that the decision was premature, arguing that the inflation rate was still high and that the move could instigate a flight of capital from the monetary market into mote speculative ones such as forex and housing markets.

Although the CBI decision was largely welcomed as a sign that the policymakers are turning from their traditional and inept responses into more proactive strategies, some saw it as "too little, too late".

Critics say the move has limited impact and is unlikely to address the perennial problems besetting the Iranian currency.

The prominent Persian-language economic newspaper Donya-e-Eqtesad has called for stopping the real appreciation of the rial if the stopgap policy is to have any lasting effect.

The market, however, was more receptive. On Thursday, as it digested the news, the rial gained some ground and was traded below 47,000 to the dollar, up from 49,000 two days ago.

The currency started gaining from Wednesday when law-enforcement forces, with a green light from the central bank, raided the hub of Tehran currency hawkers near the British Embassy in Tehran and arrested 90 traders who were deemed market disruptors.

According to Tehran police chief, Brigadier General Hossein Rahimi, his forces also shut 10 currency-trading offices as part of the crackdown.

Currency Bonds

CBI's package also, for the first time, foresees the issuance of foreign currency bonds.

The bank's governor, Valiollah Seif, had earlier announced that the bonds would be issued in collaboration with the Oil Ministry.

Explaining the measures in a meeting with bank chief executives on Thursday, Seif said the currency bonds will be issued in rial but would be based on foreign exchange, meaning that one- or two-year currency bonds will be bought by investors in rial but at the time of maturity, the yields–at 4-4.5%– will be reimbursed in foreign currency or its equivalent in rial.

The exchange rate will be calculated at an average rate of the most recent week the bond has matured. Analysts expect a final yield of 26% for these bonds.

The bank is also launching a new electronic system on Saturday to facilitate forex transactions and gradually move all trading to the platform in a bid to promote transparency in the market.

Gold Presale

CBI's last measure is aimed at curbing the ongoing bull run in the gold market through presales at attractive prices.

According to Seif, the state-run Bank Melli Iran will hold the presale of Bahar Azadi gold coins to be delivered in six months at 14 million rials ($295) and coins with a contract duration of one year at 13 million rials ($274).

As of Thursday, the benchmark coin fetched 15.77 million rials ($332).

The bank had earlier held gold coin auctions to contain the yellow metal's unprecedented rally in Tehran market, but this had little effect in restraining its price rally.