CBI Wants Banks to Buy Bonds
EghtesadOnline: Governor of the Central Bank of Iran says lenders should use a fraction of their financial reserves to buy bonds issued by the government.
“Banks and credit institutions are obliged to show government bond holdings as a percentage of their deposits in the balance sheets,” Abdolnasser Hemmati was quoted as saying by the CBI website. He did not elaborate nor say how much banks need to allocate for bond buying.
“This is part of the CBI’s new monetary policy and in line with macroeconomic precautionary measures”, Hemmati added.
By the new policy he meant the implementation of open market operation. “This will help in paving the way for implementing the OMO”.
The CBI launched the OMO in January to control lenders’ over-borrowing from the CBI and regulate interest rates in the interbank market.
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.
Observers say the bond market needs more space for the OMO to deliver the desired results.
The CBI has launched a series of bond auctions since June in a bid to expand the bond market and plug the gaping holes in the government’s fiscal budget.
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 CBI said banks were the main purchasers of the bonds and so far have bought more than 72.4% of the total.
The government so far has generated 550 trillion rials ($2.4 billion) from Islamic bonds in 12 weekly auctions held by the CBI every Tuesday.
In the latest auction on Tuesday, the government sold 45 trillion rials ($195 million) in bonds. According to the central bank’s public relations office, four banks bought 5.5 trillion rials.
Retail and institutional investors in the equity market bought the remaining 20 trillion rials outside the auction. The CBI also sold bonds worth 20 trillion rials to an investment company at 21.5%. This is the highest yield the CBI has offered so far.