Money market is not some preset place like commodity market but a collective name given to all financial institutions dealing with short term credit financing. It performs various functions like Divert saving into investment, brings financial stability by transferring credit from one sector to other, reduces the reliance on bank borrowing, easing the implementation of monetary policy, providing short term finance to governments, lending the surplus funds ( if any) for short term etc. In Pakistan primary participants of money market are many like government of Pakistan, state bank of Pakistan, commercial, cooperative and saving banks. Let's see the recent developments in components of money market of Pakistan.Treasury bills are an Obligation of government representing floating debt to finance short term gap between government receipts and expenditures and are usually issued with the maturities of 3, 6 months and 1 year. These are sold at discount and repaid at par after maturity in an open auction and the rate of discount is quoted by the bidders. Moreover they are negotiable, non interest bearing and non redeemable. The return of TB's is subject to 39% withholding tax. In Pakistan first auction took place on March 4, 1991. 292nd auction of T bill was held on 04 Nov 09 and amount realized was Rs 19,983.10 million which is less than previous amount of Rs 20,759.08 million whilst weighted average yields were 12.425% ,12.551% and 12.5517% for 3,6 and 12 months resp .
Trading in credit ceiling is another important element of Pakistan's money market. State bank fixed a credit ceiling for banks. The ceiling was fixed for 6 months but reviewed quarterly. The fixation was directly related to foreign currency deposits. If at the end of a week a bank had some unutilized portion of the ceiling it could trade it with some other institutions that had already exhausted its ceiling with the effect from August 1, 1992, the SBP has abolished credit ceilings as an instrument of credit control and replaced them by credit /deposit ratio guidelines.
Money market is in fact a call loan market. Here banks and financial institutions lend out of their surplus funds and the institutions in need of funds can borrow from the market. Call loan market balance is determined by the forces of demand and supply, thus rate fluctuates a lot. Duration of the loan in call market is usually for a very short period like 1 day or a week. N o security is generally taken because participants are well recognized institutions. These are repayable on demand.
It involves sale of securities with a simultaneous commitment to repurchase the securities on a particular date at a predetermined price including interest. REPO's can take different forms like if a commercial bank holds more securities than wanted it will sell these securities to a DFI on REPO basis. This way back can get rid of securities in the short run. Commercial bank can also ask DFI's to lend on their behalf. For this purpose they provide DFI's with securities and also pay commission for this service. Similarly if a bank holds securities and wants to keep them but needs some cash for a short period of time ,it can arrange the funds through a REPO without loosing hold of securities .
In the same manner an individual client can get cash from a bank against securities on REPO basis without loosing the ownership of securities. SBP also offers funds to banks and financial institutions on 3rd day REPO basis.
Indicative Inter-bank Average REPO and call rates
(Percent per annum)
Period | Overnight | 1week | 1months | 3months | 6months | 12months | ||||||
FY 09 | Repo | Call | Repo | call | Repo | call | Repo | call | Repo | call | Repo | call |
10.6 | 13.2 | 11.2 | 13.9 | 12.5 | 13.9 | 13.6 | 14.1 | 4.4 | 8.0 | 4.5 | - | |
(Source:Domestic markets and monetary Management Deptt, SBP)
In August 2009, SBP adopted a new framework for its monetary operation by announcing an interest rate corridor. Under this frame work, SBP introduced an overnight standing deposit facility. The rate on this facility will be 300 bps below the discount rate and would effectively act as a floor rate for the over night inter bank repo borrowings. The SBP policy discount rate on the other hand would serve as ceiling on the upward movement in the money market repo rate. Moreover because of delayed announcement of monetary policy by SBP and an eventual reduction of 100bps in policy rate (which was less than market expectation) the market interest rate adjusted upwards.
The introduction of this corridor is expecting to help in containing the excessive volatility in overnight repo rate, would make monetary policy transmission more effective and faster transparency in money market operations. Considering the unrest socio-political circumstances of Pakistan, State bank of Pakistan has also reduced its policy rate from 50 bps to 12.5%. In short a pathetic condition of law and order in Pakistan is not only affecting her foreign investments (Foreign direct investment shows a decline of 13.8 % in current fiscal year in comparison with previous FY) but also influencing money market of Pakistan pejoratively.
By : basiliskt
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