Monetary Policy

SBP uses several operational tools to manage liquidity and achieve its target rate:

Inject or mop up liquidity through repo/reverse repo transactions. In a reverse repo transaction, the SBP buys government securities from a bank/ eligible counterparty with a commitment to sell them back at a specified future date at a predetermined rate, resulting in an expansionary effect on liquidity. Conversely, in a repo operation, the SBP acts as the seller of government security and the counterparty’s payment to the SBP has a contractionary effect on liquidity. Besides the usual injection and mop-up operations of varying tenors, the SBP also conducts Outright Sale or Purchase for structural/ long-term liquidity management and also has a whole monetary operations framework for Islamic segment of the money market.

The SBP offers standing liquidity (lending and deposit) windows to provide or absorb liquidity at the initiative of the counterparty. These standing overnight facilities are available on demand to qualified counterparties during business hours. The two standing facilities that form the upper and lower bound of the corridor are set at ± 100 basis points (bps) around the policy (target) rate:

• Overnight Floor Facility: The standing overnight floor facility will absorb any residual system liquidity to prevent market interest rates from falling below the corridor. Interest rate for the floor facility is the policy rate minus 100 bps (1.0 percentage point). The interest rate for the overnight deposit facility serves as a floor for the overnight interbank repo rate
• Overnight Ceiling Facility: The standing overnight ceiling facility provides collateralized overnight funding to SBP counterparties to clear end-of-day imbalances. Interest rate for the Ceiling facility is the policy rate plus 100 bps (1.0 percentage point). The interest rate for the ceiling facility serves as a ceiling for the overnight interbank repo rate

Ensure liquidity discipline in the banking system through cash and statutory reserve requirements:

• Cash Reserve Requirement is a percentage of banks' total liabilities or some subset thereof which banks are required to hold as reserves at the Central Bank. Under current regulations (Section 36 of SBP Act, 1956), all scheduled commercial banks, microfinance banks, Islamic banks and Islamic banking subsidiaries of the commercial banks are required to maintain a certain proportion of their liabilities in the form of cash with SBP
• Statutory liquidity requirement (SLR) is the proportion of bank’s liabilities that they are required to invest in approved securities and/or hold in the form of cash including balances with SBP, balances with NBP, balances left in the vault of banks, banks’ investment in capital of Micro-Finance Banks (MFBs) and foreign banks’ deposits with SBP under section 13(3) of the Banking Companies Ordinance 1962

This is another instrument that SBP may utilize for liquidity management in the interbank money market to supplement its open market operations. Forex swap involves SBP’s purchase or sale of foreign currency at a certain value date (normally spot) with a simultaneous agreement to reverse the transaction at an agreed rate on a specified date in the future. SBP may conduct both sell-buy and buy-sell swaps in the foreign exchange market with the objective to temporarily mop-up and inject rupee liquidity in the money market, respectively.