The CBO usually ensures that there is adequate liquidity in the system by absorbing and/or injecting liquidity from time to time depending on the situation through various instruments at its disposal.
The CBO employs the following instruments to bring about the targeted liquidity changes:
Reserve Requirements: The most-widely employed direct instrument of monetary control used by central banks. The CBO also employs this instrument and immobilises a fraction of the banking system resources by prescribing that banks have to compulsorily maintain a portion of the deposit base by way of cash balances and/or securities with the CBO. By raising or lowering the reserve requirement ratio, CBO will be able to impound or augment the system liquidity.
Repo/ Reverse Repo operations: Central banks extend the facilities of repo and reverse repo to banks to enable them to borrow short term funds/ to invest short term surpluses against approved securities which are used as collaterals. These instruments are employed by a large number of central banks across the world to affect the systemic liquidity. The CBO extends the repo facility only to banks for a period extending up to 26 days against collaterals of CBO, such as: Certificates of Deposit, Government Treasury Bills and Government Development Bonds. The interest rate on this facility is announced on a weekly basis.
The CBO Policy Rate (Repo Rate) is derived using upper
bound Target Federal Funds Rate (TFFR) + spread of (50 basis points). This facility is available to licensed banks at their initiatives as per allocated limit up to the collaterals they own.
Discount/ Rediscount of Commercial Papers: CBO also extends the facility of discounting/rediscounting commercial papers up to specified maturities to the Licensed banks in the Sultanate. The commercial papers should have arisen out of genuine trade transactions like import, export, storage, trading, production, processing, conditioning and marketing and transportation of industrial goods and agricultural produce. Each licensed bank is allocated a limit up to which this facility can be availed from the CBO. As in the case of CBO’s Policy Rate, the interest rate on Discount facility is also announced on a weekly basis.
Certificates of Deposit: Certificates of Deposit (CD) issued by the CBO to licensed banks. They are short-term instruments, to absorb liquidity when CBO considers it appropriate. The primary objective of CDs is to mop up the excess liquidity in the banking system, and to ensure that the inter-bank money market functions in a stable and orderly fashion.
CDs are issued in different short term maturities, at the discretion of the CBO and as considered appropriate for attaining the monetary policy objectives. The issuance of CDs is done on a weekly basis (every Tuesday) through an online auctioning system (Depox-SSS) where local Banks wishing to apply for CDs should submit their bids (expected rate of interest on CDs) through SSS-interface between 09.30 am and 11.00 am (Oman Local Time).
CDs are normally issued on Wednesdays by debiting the clearing accounts of the allotted banks. On the maturity date, the clearing accounts of the banks are credited with the principal amount plus the interest.
Discounting of Treasury Bills: CBO also extends the facilities of discounting the treasury bills anytime during the life of these instruments. CBO TBs Discount Rate is derived using CBO
Policy Rate (REPO) + spread of (50 basis points).
Foreign Exchange Swaps: CBO offers the facility of Foreign Exchange Swaps to banks whereby the banks are permitted to swap US Dollars for Rial Omani (RO) to meet their short term liquidity requirements in RO. The swaps are offered for durations ranging from overnight up to a maximum of one month. The USD/ RO spot exchange rate will be the mid rate between bid and offer rates as per CBO quotations, that is 384.5 baizas per USD. For arriving at the forward rate, appropriate benchmarks rates for both USD and RO are used. In addition, an adjustment factor is also loaded on to the forward rate.
The foreign exchange swaps are undertaken with banks by the CBO within the pre specified limits allocated to banks.
Direct Lending of US Dollars to Local Banks: In addition to reverse swaps, CBO has also introduced a scheme of direct lending in USD to licensed local banks for a period of one /three months at a suitable spread over the prevailing LIBOR rates.
The last two facilities are made available by the CBO to the licensed local banks to meet their liquidity requirements during abnormal times. . The USD funds under these two facilities are allowed within a combined pre specified limits allocated to banks. Since these two facilities have been extended by the CBO more as measures to alleviate the impact of the financial crisis, they are not expected to serve any monetary policy objectives.