SUBMITTED BY:

SARAH AMMAR

REGISTRATION NUMBER:
5285-FMS/BBA/F18

SUBMITTED TO:
MA’AM FARHA ZAMIR

DATE: APRIL 29TH,2021

Money Market:
➢ The money market involves the buying and selling of large quantities of short-term credit
products, such as overnight stocks or trading paper.
➢ An individual can invest in the money market by buying a mutual fund, by purchasing a
Treasurer's loan, or by opening a money market account in a bank.
➢ Investment in the money market is characterized by security and cash flows, with stock market
shares targeted at $ 1.

Instruments in Pakistan:
➔ Treasury Bills
➔ Commercial Papers
➔ Certificate of deposits
➔ Repurchase/ Repo
➔ Reverse Repurchase/ Reverse Repo:

Treasury bills:
➢ T-bills are issued by the bank on behalf of the government to overcome liquidity shortfall.
➢ These bills are different from other types of investments because they don’t have to pay tax in a
traditional way.
➢ In Pakistan these bills are issued at a fixed rate.
➢ State bank is using two methods to trade T-bills.
➢ One is an auction system and the other is Open Market Operation (OMO).
➢ They are issued with the maturity of 3, 6 and 12 months.

Commercial paper:
➢ These are un-secured promissory notes issued by highly known companies.
➢ Maturity period is between 30 days and one year from the date of subscription.
➢ Highly rated companies and financial institutions issue commercial papers with minimum equity
of 100 million.
➢ Rate of return= (par value- purchase price)/par value×360/days to maturity

Certificate of Deposits:
➢ A Certificate of Deposit is a time deposit with a bank.
➢ Provided by commercial banks but they can be bought through brokerages.
➢ They have specific maturity dates (from three months to five years, and a particular interest rate
and can be provided in any denomination.
➢ CDs offer a maximum yield than T-Bills because of the slightly maximum default risk for banks.

Repurchase/ Repo:
➢ A repurchase agreement is the sale of a security with a commitment by the seller to purchase the
security back from the buyer at a specified price at a designated future date.
Reverse Repurchase/ Reverse Repo:
➢ Reverse Repurchase is an agreement to buy and resell a mortgage at a certain price and a specific
future date.
➢ It is a mirror image of Repo transactions
➢ Provider of funds does a Reverse Repo transaction.

Current situation of money market in Pakistan:

➢ Money market rate on Feb 2021 was 7.31

➢ Treasury Bills (over 31 days) on Feb 2021 was 7.49
➢ Kibor rate on 27-Apr-21

Tenor BID OFFER

1 – Week 6.82 7.32

2 – Week 6.88 7.38

1 – Month 6.98 7.48

3 – Month 7.19 7.44

6 – Month 7.40 7.65

9 – Month 7.51 8.01

1 - Year 7.58 8.08

The State Bank of Pakistan, in a meeting of the Monetary Policy Committee (MPC) on Thursday, slashed
the country’s policy rate by 100 basis points from 8pc to 7pc.

Significance of money market in economic development of Pakistan:

The State Bank of Pakistan (SBP) has maintained a policy rate of 7.0 percent to support the economy. The
cash flow rate at End-December 2020 always exceeds the regulatory requirement, which indicates the
strength of the banking sector in the first half of the financial year. The SBP said that despite SBP
reserves declining to $9.96 billion as of June 19, Since then, the SBP has received fresh disbursements
from multilateral agencies. This includes around $725 million from the World Bank and $500 million
from ADB, while another $500 million is expected shortly from the Asian Infrastructure Investment Bank
(AIIB).
It could be argued that the SBP waited in order to make sure it had some reserves before cutting the
interest rate again. Thus, additional reserves can serve as a safe haven from eliminating any outflow of
funds due to the reduced policy rate. As part of the International Monetary Fund (IMF) loan agreement,
Pakistan has been given strict guidelines on keeping interest rates (the minimum interest rate minus the
inflation rate). The rapidly declining inflation rate has given the SBP a moving room to lower the policy
rate, something MPC has adopted in today’s statement.

The MPC was somewhat concerned about Pakistan's economic and financial future, in view of the
Covid-19 epidemic, but said the foreign sector's vision remained stable. Although Pakistan's economy is
expected to slowly recover from FY21, the SBP has said there are a number of risks, and that recovery
will largely depend on the changing nature of the epidemic. both in Pakistan and abroad. Large-scale
manufacturing had declined, while cement dispatches, automobile sales, food and textile exports have
also contracted in May. However, on the bright side, the SBP noted that the current account recorded a
surplus in May on the back of a reduction in the trade deficit, and a pick-up in remittances compared to
the previous month.