I received the below message from Substack. If you were confused by receiving two posts from me earlier, I apologize.
SBP increased the policy rate by 250 bps on April 7 and called it a proactive approach.
The spokesman for the finance minister also called it proactive.
I don’t know which world SBP is living in as a day earlier, the T-bill auction depicted a completely different picture with the 3-month T-bill cut off at 12.80%. This shows SBP behind the curve.
Bank borrowings’ aren’t priced based on policy rate. They are priced based on KIBOR. Whereas the short-term (1-Month and less) KIBOR rates did move after the increase, the longer tenors (3M, 6M, and 1Y) decreased, implying that banks had already incorporated the increase in longer-term rates. It was a matter of when and not if the SBP will increase the policy rate. In a way, the policy rate had become irrelevant.
Thus, it is wrong to say that the SBP policy was proactive. SBP was reacting to what the market has been asking for some time.
Will it help control inflation? You know where I stand with respect to the impact of policy rates on reducing cost-push inflation. But I have been wrong many a time, so who knows, the policy rate increase may help control inflation. If the policy rate increase is to bring in hot money, then it has been shown to work in late 2019 and early 2020.
SBP also took other steps, such as increasing the cash margin on the import of certain items and increasing the rate on the export finance scheme. I may look at it at some other time.
The RRPs are at their highest balance historically at Rs.3.085 trillion.
In my earlier post, I explained that whereas technically, RRPs are for injecting liquidity into the market, SBP is using RRPs to lend to the Government of Pakistan through the backdoor.
The current OMOs are not for liquidity shortages.
This is SBP encouraging carry trade in T-bills.
This is an open secret in the money markets of Pakistan: Borrow short term on RRPs at 9.9% and lend to GoP for 3 months 10.4%.
Earlier, SBP was allowing the banks to make a spread of 40-50bps on a 3M T-bill. The same is the case now. SBP is lending money to the banks at 12.3% which they will lend to GoP by buying T-bills at 12.8%, a spread of 50bps.