On January 24, 2025, the State Bank of Pakistan (SBP) conducted a substantial open market operation (OMO) aimed at addressing liquidity imbalances in the financial system. Through this operation, the central bank injected a total of Rs10.31 trillion into the market. This move, which includes both conventional and Shariah-compliant operations, was intended to alleviate the ongoing liquidity shortage faced by the banking sector and to stabilize the market.
The majority of the injection, Rs9.61 trillion, was provided through a reverse repo operation under the conventional OMO framework. In this operation, SBP agreed to lend funds to banks and primary dealers (PDs) against eligible collateral, specifically government securities like Market Treasury Bills (MTBs) and Pakistan Investment Bonds (PIBs). This type of OMO is typically used to address short-term liquidity gaps in the financial system, ensuring that banks have access to sufficient funds to meet their daily operational needs.
In the reverse repo operation, banks are required to offer eligible government securities as collateral in exchange for the injected funds. According to the summary released by the SBP, the reverse repo operation for a 7-day tenor saw an offered amount of Rs9.61 trillion, all of which was accepted at an interest rate of 13.04%. The rate range for the operation was between 13.10% and 13.04%, with the accepted rate standing at 13.04%.
Alongside the conventional reverse repo operation, the SBP also executed a Shariah-compliant Modarabah-based OMO. This operation, which is designed to cater to the needs of Islamic banking institutions, saw Rs706 billion injected into the market. Under this arrangement, funds were lent to eligible banks and PDs against Shariah-compliant securities, specifically the GOP Ijara Sukuk. The 7-day reverse repo operation under the Modarabah-based framework saw an offered amount of Rs906 million, of which Rs706 million was accepted at a rate of 13.08%, with the rate range for the operation being 13.12% to 13.08%.
Open Market Operations are a vital tool for the SBP in managing liquidity levels within Pakistan’s financial system. By either injecting funds or mopping up surplus liquidity, the central bank can influence short-term interest rates and ensure that the banking system operates smoothly. In case of liquidity shortage, like today’s injection, SBP conducts an OMO injection, which helps banks manage their funding needs, especially during periods of heightened demand for credit or financial instability. Conversely, in situations where there is excess liquidity in the system, the SBP may conduct an OMO mop-up by selling government securities to absorb the surplus funds.
The SBP’s ability to inject liquidity through OMOs plays a crucial role in maintaining financial stability in Pakistan, particularly during times of economic uncertainty. These operations help ensure that the banking sector remains adequately capitalized, supporting lending activities to businesses and consumers. The OMO process also supports the smooth functioning of the country’s interbank market by stabilizing short-term borrowing and lending rates.
The SBP’s intervention in the form of Rs10.31 trillion in OMO injections is a significant move to ensure that the financial system can continue to operate efficiently, even amidst challenges such as high inflation, fluctuating currency values, and fluctuating foreign exchange reserves. The central bank’s use of both conventional and Shariah-compliant OMO tools also highlights its commitment to addressing the needs of Pakistan’s diverse financial ecosystem, including both conventional and Islamic banking sectors.
Overall, today’s OMO operation reflects the SBP’s ongoing efforts to manage liquidity, stabilize the financial markets, and support economic growth through its monetary policy tools. By injecting liquidity into the market, the SBP continues to play a crucial role in ensuring that Pakistan’s financial system remains resilient and adaptable to global economic fluctuations.