EghtesadOnline: Governor of the Central Bank of Iran Abdolnasser Hemmati has denied accusations that the CBI's interest rate policy had a role in the stock market collapse in the last calendar year that ended in March.
Discussing CBI polices with a group of economists via Clubhouse, the newly lunched social media network, Hemmati denied the bank had intervened in the bourse with design and direction.
In recent months stock market authorities, investors and economic experts have singled out the CBI for its implicit role in the market crash accusing it of “manipulating bond and interbank interest rates.” The bank has always denied the charges.
Hemmati said "The CBI is being unfairly accused. Why should it raise interest rates, lower it and raise it again?" He was responding to one participant who asked: "To what extent do you think CBI policies are responsible for the stock market crash?"
The senior banker ascribed the sharp decline in the interbank interest rate in May 2020 to the “excess reserves of banks with the CBI due to Covid-19 spread and a general decline in business activity" following lockdowns to control the deadly virus,, newswires reported.
"At times banks had almost 710 trillion rials ($2.8 billion) in excess reserve with the CBI. Now it has dropped below 200 trillion rials ($800 million). In short, demand for money has increased in the interbank market.”
In his opinion excess reserves in the interbank market dragged down interest rates. "A part of the excess liquidity was collected by selling bonds," he said.
Riding on the back of the liquidity tsunami in the bourse, the main gauge of Tehran Stock Exchange, TEDPIX, jumped 300% in the first half of previous fiscal and crossed the historic high of 2.1 million points by mid-August. However, with investors in big numbers fleeing the market, the TEDPIX lost half its value and plunged to near one million points.
As per CBI data, interbank rates were choppy in the past months. On average the rate was 18.95% in fiscal 2019-20 before abruptly dropping to 10% in May 2020 and paving the way for the unprecedented rise in share prices.
Interbank rates began to rise steadily in the months after to reach 23.2% in late October. The rate was reported around 20% in the month to Dec. 20.
Observers say the sharp decline in interbank rates was a “positive signal to the stock market” and the main cause behind the departure of liquidity from banks to the bourse as parking money in banks was no longer attractive.
Skeptics who point the finger of blame at the CBI and its monetary policies namely its known efforts to curb the ballooning money supply, saying that by lowering interbank rates and propping up the appeal of the share market, excess liquidity flowed into the market only to trap investors when the bubble burst.
Amir Hamouni, head of Iran Fara Bourse said earlier that more than 1,200 trillion rials ($4.8 billion) flowed into the bourse in the first half of the last fiscal year (March-Sept 2020).
Hemmati linked the unprecedented upsurge to a general increase in inflation expectations that later rattled other markets, namely forex, gold, housing and the auto market.
Reservations About Currency Policy
Regarding the CBI's often contentious forex policy, Hemmati said he strongly opposes injecting currency in the market to sharply curb rates.
"Instead, I insist that forex market stability is a more important issue. Rates must be determined by market forces," he said, echoing concerns of some experts that the sharp decline in forex rates would only add to capital outflow from the country.
"In my opinion forex rates should not drop to levels that tempt capital outflow," he said, in response to a question about the potential impact of unfreezing billions of CBI forex assets blocked overseas on the chaotic currency market.
"The CBI will not be injecting the unlocked forex in the market. That will not happen. Our currency intervention will be premised on policies that don't allow outflow of capital."
Dwindling revenues limited the CBI's ability to intervene in the forex market last year when currency rates skyrocketed due to the US economic blockade.
The currency crunch was accompanied by rising expectations of higher inflation among the public anxious of the de facto devaluation of the rial, galloping inflation and prices rising as never before. That understandable anxiety pushed them to invest their hard-earned but devalued rials in safe havens like shares, currency and gold.
The dollar rate almost doubled in less than six months from May to mid-October reaching an all-time high of 323,000 rials. The greenback later declined by 90,000 rials with rising expectation influenced mainly by the change of guard in the United States and the likelihood of easing banking and financial sanctions.