EghtesadOnline: The Central Bank of Iran says it is restraining surplus liquidity of banks in the interbank market. In a press release posted on its website, the CBI said it implemented the reverse repurchase agreement (reverse repo) in which banks give money to the CBI in lieu of bonds.
The regulator said it reduced 64.5 trillion rials ($258 million) in surplus liquidity from three banks. The bonds purchased by banks will mature in seven days at 18%.
It said it implemented reverse repo following the hoarding of liquidity in the interbank market. While the regulator was injecting money in the interbank market in the first weeks of the new fiscal year (started in March), it reversed course in the past two months to control and absorb the excess liquidity.
As a component of open market operation, 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 with short-term maturities, and buys it back the at the maturity date at slightly higher price.
A reverse repo is a short-term agreement to purchase securities in order to sell them back at a slightly higher price. Repos are typically used to raise short-term capital.
With excess liquidity banks did not borrow from the CBI under the so-called “structured borrowing”, a pattern that persisted in the past several weeks, the Persian-language economic website Eqtesad News said.
Structured lending is a process through which banks put bonds as collateral with the CBI to borrow money. Banks in critical need of credit borrow at 22% from the CBI, which is the upper bound of interest rate corridor (IRC). Banks with surplus credit deposit money with the CBI at 14%, the lower bound of the IRC.
With the CBI pushing to downsize the money supply in the highly charged interbank market, rates in this market declined in recent weeks.
Rates declined to 18.2%, down from 19.6% on May 20. Prior to that rates vacillated between 19.56-19.9% from mid-February to mid-May, according to the CBI.
Lower interbank rates bode well for stock market investors as it renders investment in stocks more rewarding for banks and credit institutions.
Iran’s interbank market was established in July 2008 to improve oversight of banks’ liquidity facilitating short-term lending among banks, maintaining monetary discipline and facilitating implementation of CBI monetary policies.
Open market operations were launched in early 2020 as part of a CBI measure to reduce lenders’ dependence on the CBI, curb inflation and control interbank market rates.