“Liquidity Management Via Interest Rate Corridor in Pakistan- and Experience of Other Countries’ Emerging Markets”

STATE curse OF PAKISTAN SUMMER INTERNSHIP PROJECT REPORT 2011 Liquidity precaution via Interest target Corridor in Pakistan- and Experience of Other Countries Emerging Markets Submitted to Sir Mubarak By Tooba Sarfaraz Rafia Parvez Sumbul Masood portal to recite aver of Pakistan carry shore of Pakistan, the primordial argot of the country was realized in July 1948 I. e. , within one year after Pakistan gained independence.Being the central bank, it regulates the pecuniary insurance and the credit system of the country to foster its suppuration in the best national interest with a view to see monetary stableness and to fully utilize the productive resources of the country. The banks operations also include preserving the value as swell as maintaining stability in the Banking system. flock To trans solve the SBP into a modern and propellant central bank, highly professional and efficient, fully equipped to play a meaningful role in sustainable basis in the stinting al and social development of Pakistan. Mission To promote monetary and financial stability and foster a sound and dynamic financial system, so as to achieve, sustained and equitable economic growth and prosperity. Introduction to Domestic markets and monetary wariness department (DMMD) Domestic Markets and monetary commission department was created in Sept 2006 as a result of comprehensive restructuring within State Bank of Pakistan with the objective of trans course of studying the central bank into a dynamic launching more responsive to the growing sophistication in the financial markets. DMMD is an outgrowth of the previous Exchange and Debt anxietyDepartment (EDMD), which was established in Feb 2000. Vision To illust array a proactive, professional and planned approach for effective management of fill in and debt markets so as to contribute towards accomplishment of exchange and monetary policy objectives. Mission DMMD strives to set performance benchmark within SBP an d Pakistans financial markets. Departmental goals The core objective of DMMD is to employ the monetary policy objective of the State bank of Pakistan by using the in stock(predicate) tools in both the coin and foreign exchange markets.Departmental objectives * pecuniary form _or_ system of government Implementation a. Maintenance of stable interest grade in inter-bank specie market by dint of proactive management of money market liquidity. b. bringing up abruptly term government debt and developing yield curve through auction of market treasury bills c. Proactive management of money market liquidity through open market operations d. Liquidity management through interest rate corridor system. * Exchange Rate Policy Management a. Stable exchange rates and Forward premiums at appropriate /sustainable levels b.Sale and purchase of third currencies at optimum prices c. Smooth and sufficiently liquid foreign exchange markets d. Optimal accumulation of foreign exchange modestys a nd forward portfolio * Re reply Management a. Optimal utilization of reserve portfolio and maximum returns on investiture of surplus reserves. Hiring of investment consultants and fund managers for optimizing returns. * Debt Management a. Domestic debt i. Developing the markets for government securities ii. Coordination amidst monetary and fiscal policies iii. rhytidectomy short term and long term domestic debt for the government v. information base management of permanent and floating debts. b. External debt i. Monitoring and ensuring command prompt payment of external debt installments through state bank of Pakistan and commercial banks. Introduction of an Interest Rate Corridor In order to reduce the volatility in short term interest rates and to bring more foil in the implementation of monetary policy, State Bank of Pakistan has decided to come before an interest rate corridor for the money market overnight repo rates. The corridor leave behind charter through standing o vernight repo / reverse-repo facilities (i. . floor &038 ceiling), setting a stiff corridor for the money market overnight repo rates consistent with the monetary policy of State Bank of Pakistan. The salient features of the interest rate corridor are as follows 1. The interest rate corridor will consist of two end-of-day Standing facilities offered by State Bank of Pakistan Existing SBP 3-day Repo Facility will be renamed as SBP overnight Reverse-Repo Facility, which will become the Ceiling and a new SBP Overnight Repo Facility to absorb pleonastic cash in hand from the market will serve as the Floor of the corridor. . The procedure for availing the end-of-day financing preparedness from State Bank of Pakistan at the Ceiling rate in case the market is short of funds will lead to be in accordance with the quick practices and instructions issued by State Bank of Pakistan from time to time in reference to the SBP 3 day Repo Facility (now renamed as SBP Overnight Reverse-Repo Fa cility) against political science of Pakistan Market Treasury Bills and Federal/Pakistan Investment Bonds. 3.The overnight end-of-day standing repo knack at the Floor rate will be available to schedule banks and primary dealers which are left with excess funds in the interbank market. These funds can be placed with State Bank of Pakistan in the form of an overnight repo against Treasury Bills at the Floor rate. Some of the operational elaborate are as under a. Only scheduled banks and primary dealers will be eligible to place the funds at the Floor rate with State Bank of Pakistan . This facility will only be available at the end of the day, when it can be ascertained that the market has excess funds. c. The time for intimating this get to the State Bank of Pakistan will be between 230pm to 3. 30pm from Monday to Friday and between 1200pm to 1. 00pm on Saturday. (Specimen format is enclosed). d. The minimum amount for the Overnight Repo/Reverse Repo Facility will be PKR. 100 mill ion, and in multiples of PKR. 50 million thereof. e.The Treasury Bills acquired under the Standing Overnight Repo facility from State Bank of Pakistan will be SLR eligible. 4. The Floor and the Ceiling rates (and the width of the corridor) will be advised by the State Bank of Pakistan from time to time as deemed necessary. 5. State Bank of Pakistan will continue to conduct term Open Market Operations (OMOs) in the form of repos/ reverse-repos as per current practice in addition to these standing facilities. 6. The interest rate corridor will be applicable from 17Aug, 2009. i. MONETARY POLICY Monetary policy is the mechanism or the process through which the government, the central bank or the monetary authority of any country controls or determines the (a) add up of money, (b) the availability of money, (c) the cost of money or the interest rate, keeping in mind the broad strategic objectives of the state regarding price level, growth and stability in an economy and the overall poli cies that supports or under which people would insufficiency to start businesses and provide employment.When the incident of 9/11 happened, the overall economic environment of the world was affected very seriously and an impact of fasten monetary policy also falls. After the incident the foreign investment shoot up and flow of money continuously increased, although the value of money was stabilized but it causes inflation in many countries as well as in Pakistan. The inflow of foreign remittances resulted in inflationary pressure.In 2001, SBP revised its policy to control the flow of money. Since 2004, SBP in continuously progeny monetary policy statement biannually from Jan-June and second from July-Dec. TOOLS FOR IMPLEMENTING MONETARY POPLICY To implement its objectives , some tools are required 1. Direct Instruments 2. Indirect Instruments DIRECT INSTRUMENTS * coin Reserve Requirements (CRR) * Statutory Liquidity Requirements (SLR) CASH RESEVE REQUIREMENTS (CRR)