CBI Lends to Banks Under OMO

EghtesadOnline: The Central Bank of Iran says it lent to banks last week in need of liquidity by implementing open market operation.

News ID: ۷۵۱۴۶۹

14 November 2020

The CBI conducted the repurchase agreement (repo) and gave 26.5 trillion rials ($100 million) to lenders who had announced their need for short-term liquidity.

In a press release posted on its website, the CBI said it had received eight requests from banks wanting to sell government bonds to the CBI under the repo mechanism. That was the second repo operation by the CBI.

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 on an overnight basis, and buys it back the following day at a slightly higher price. Repos are typically used to raise short-term capital.

The CBI said it had given "short-term emergency credit" to two banks worth 39.3 trillion rials ($151m) in the last Iranian week.

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, selling government bonds reduces the money base and raises interbank rates.

Apart from regulating interbank interest rate, using bonds as collateral to borrow from the CBI is also a key element of the OMO.

Positive Sign

Lending under repo was at 20% -- an interbank rate seen by many as a CBI signal that the regulator is not in favor of higher interest rates in the interbank market. By extension, it also is construed as the central bank's unwillingness to raise interest on deposits.

Amir Hamouni, CEO of Iran Fara Bourse (junior equity market), hailed the CBI move to lend to banks at 20% as a policy aimed at "balancing the debt and money market".

"The stock market got a strong signal from the monetary regulator….  At financial markets, debt market and stock market act like communicating vessels," he wrote in a twitter post.

Last week the CBI said "the average interbank rate reached a peak in the month to Oct. 21, registering an average of 20%", adding that the rate surpassed the upper bound of interest rate corridor (IRC) in the final days of the month.

As a component of the OMO, IRC is a mechanism under which the CBI sets the floor and ceiling of policy rates and lets other money market rates, such as interbank rate, move within this setup.

CBI Governor Abdolnasser Hemmati on Thursday warned lenders that high interest rates in the interbank market exposes banks’ poor balance sheets.

Speaking at a meeting with CEOs of banks, Hemmati asked them to observe the 20% lending rate in interbank transactions and avoid higher rates.

Banks were also asked to abide by rules governing deposit rates set by the Money Credit Council.

Local media reported recently that three banks are offering up to 20% on deposits. This is while lenders, as per MCC rules are not allowed to offer more than 18%  on term deposits.

Observers say the CBI's insistence on lower rates could have a positive effect on the struggling share market in Tehran because lower rates apparently direct liquidity to the bourse.

As per CBI data, interbank rates have increased steadily in recent months after dropping to 10% in June.

Average interest rate in the interbank market reached 14.8% in the fifth month of the fiscal year (to August 21). It further increased 17.2% on average a month later (ending Sept. 21).

The CBI raised the lower bound of interest rate corridor (IRC) in the interbank market to 14% in August.  The upper bound now is 22%.