The aim is to control money supply in the interbank market, the CBI public relations office said in a press release.
This plan was first floated by the governor of Central Bank of Iran, Abdolnasser Hemmati, last week. “Banks and credit institutions should, in their balance sheets, show government bond holdings as a percentage of their deposits.”
Market analysts say the new measure is part of the CBI’s monetary policy to implement open market operation. The CBI says “it will help pave the way for implementing the OMO”.
CBI launched the OMO in January to control lenders’ over-borrowing from the CBI and regulate interbank market interest rates.
In the OMO framework, central banks buy government bonds to increase the money base (cash reserves) and by extension curb inter-banking lending rates. In this framework banks can hold bonds as collateral to borrow from the CBI.
OMO needs an extensive and deep bond market to produce the desired results. To expand the bond market and ease access of lenders to government bonds, the CBI has launched bond auctions since June.
Bond auctions also help the government plug gaping holes in the fiscal budget by raising money from the interbank market without the need to borrow from the CBI and increase the monetary base.
On the outcome of twelve rounds of bond auctions, the CBI said Wednesday it has so far sold 573.1 trillion rials ($2.5 billion) in Islamic bonds.
Main Clients
Buyers of government bonds largely are banks, investment funds, insurance companies, government creditors and contractors of development projects. A portion of bonds are sold on the stock market.
The lion’s share of bonds are bought by banks, accounting for 69% of the total. Investors in the stock market bought 27% and the reaming were bought by investment funds.
The government says it has plans to carry on with the bond offers throughout the fiscal year to balance its budget. It plans to issue bonds worth 1,240 trillion rials ($5.4 billion) – a figure beyond what is forecast in the March 2020-21 budget, said Mehdi Banani, head of the Debt Management Department of the Economy Ministry.
Banani added that the government needs to sell 940 trillion rials ($4.2b) in bonds during the first half the fiscal year, 620 trillion rials ($2.7b) of which is above the figure projected in the budget.
He predicted that the government will need to sell another 620 trillion rials before the current fiscal year is out to cover deficit spending needs, ISNA reported. Almost 750 trillion rials ($3.2b) of government revenue from bond sales has been realized so far.