The overnight rate pegged at 9 percent and, like last week, the banks resorted for discounting to manage their daily reserve position, a leading money market expert said.
The money market remained tight during last week and after little over six months it witnessed discounting in excess of Rs 114 billion where, contrary to expectations, no injection of liquidity surfaced from the central bank. The money market remained extremely tight the whole week, with overnight repos trading at 8.9 percent throughout. Rates remained high due to the carry-over effect of two weeks' liquidity shortages and a large pick-up in the T-bills auction held during the week.
Total amount of discounting, that took place in the first 15 days of April 2006, is now in excess of Rs 114.321 billion, which is the largest quantum witnessed since October 2005 when the total discounting during the month had reached Rs 114.662 billion. The extremely large quantum of discounting is indicative of a market severely short of liquidity. It should also be noted that Rs 15.10 billion injected into the market during the previous week to relieve liquidity pressures flowed back on April 15, 2006 adding to the shortage. Heavy participation in recent T-Bill auctions was based primarily on slowing inflation and had given rise to expectations of a rate cut in the near future. "It is our assessment that the tight liquidity situation is an indication from the SBP that such optimistic expectations are premature."