State Bank of Pakistan through DMMD Circular No. 20 of 2021 has increased the Cash Reserve Requirement (CRR) by 1% for banks. SBP has taken the step to tighten monetary policy and mop up excessive liquidity from the system. As per the statement issued by SBP , average CRR to be maintained during a period of two weeks by scheduled banks, has been increased from 5% to 6% and minimum CRR to be maintained each day from 3% to 4%.

CRR is the percentage of Bank’s Demand and Times Liabilities, which banks are required to keep with SBP and is applicable on demand and time liabilities (DTL) of less than a year.

SBP data suggests that Pakistan’s DTL (<1yr) is roughly Rs. 17 trillion. Hence, 1% increase will reduce the liquidity of banks by Rs150 to 170bn as existing CRR requirements are calculated at Rs. 900 billion.

Analyst believe that the said action by SBP is continuation of Monetary Tightening as SBP has previously increased policy rate by 0.25% in last Monetary Policy announcement. Their is also a consensus that in upcoming Monetary Policy to be held on 26th November, Policy rate is bound to increase by minimum 50bps.

During Last couple of years, amid government’s endeavour to stir economic growth, Pakistan witnessed massive MOney Sypply growth (2020:17.5%, 2021:16.2%). Above average M2 growth is led by increased government borrowing from banks, rising private sector credit and increasing remittances. Hence, the policy initiatives taken by SBP to curtail inflation tend to have reduced impact, when Money Supply has spiraled out.

After 1% increase in CRR, banks are expected to reduce their investment or lending

SBP is all set to hold T-Bill auction on 17th November, 2021, where less participation is expected along with higher rates, while money market rates are expected to rise marginally.

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