Monetary Policy Instruments

Monetary Policy Instruments

In order to ensure efficient implementation of the monetary policy, control its operational target, banking system liquidity condition and the short-term interbank market rates the National bank of Tajikistan (NBT) uses the following monetary policy operational instruments:

- Open market operations;

- Standing facilities;

- Minimum reserve requirements;

- Foreign exchange operations;

Structure of the monetary policy operational instruments

Open market operations

Open market operations are considered to be the active and efficient monetary policy tool, where they include liquidity (banks reserves on the correspondent accounts within the NBT) absorbing operations and/or liquidity providing operations to the banking system through the auctions. A special feature of open market operations is that it allows the NBT to have initiative while influencing the liquidity condition and the short-term interbank market rates.

The NBT’s open market operations are in general divided into two groups:

1) Certificates of deposit (CDs) auctions

The issue of CDs as one of main indirect tools of monetary policy allows the NBT to absorb excess liquidity of the banking system on auction basis and to regulate market condition. The CDs auctions are held regularly according to schedule in real-time where credit institutions submit bids to purchase NBT CDs.

Currently, the maximum bid rate for NBT CDs is set at the level of refinance rate and the maturity of CDs are 14, 28 and 91 days. However, with a view of ensuring monetary policy efficiency, the NBT can issue CDs for sale with other terms as well according to the Instruction No.189 “On securities of the National Bank of Tajikistan” .

2) Credit auctions

The given credit mechanism includes short-term liquidity loans, which provides conditions for access to short-term liquidity from the NBT by means of auctions. The NBT conducts credit auctions on a regular basis every week according to schedule with the maturities of 14 and 28 days. Currently, the minimum interest rate for credit institution’s bid is set at the level of refinancing rate. Government issued securities, NBT CDs, foreign exchange and savings in the NBT can be used as collateral to obtain loans from NBT. The legal framework, terms and conditions of specified credit operations are regulated under the Instruction No.220 “On short-term refinancing operations”.

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Standing facilities

Standing facilities are intended to absorb or inject liquidity for overnight to ensure efficiency of monetary policy and its operational design, development of money market, steering short-term interbank market rates, providing access to short-term liquidity from the NBT, and to enhance the effective and regular functioning of payment systems.

Within the mechanism the NBT offers two types of standing facilities operations to credit institutions:

1) Overnight loans as standing overnight liquidity providing facility gives to credit institutions access to the NBT liquidity for one day in case of temporary shortage of liquidity while carrying out settlements, at the interest rate set by the NBT and eligible collateral  (in the American system the given tool is called “Discount window”, and in European system “Marginal lending facility”).

2) Overnight deposits as a standing overnight liquidity absorbing facility is offered by the NBT with purpose of temporary withdrawing excess banking system liquidity. Within the limits of the given tool a credit institution by carrying out overnight deposit operation can deposit free money resources to the NBT for one day at the interest rate set by the NBT.

The overnight credit and deposit operations are held according to bank’s inquiries within business days of the week. The interest rates on the given operations are set by the NBT Monetary Policy Committee.

It is necessary to mention that within the limits of mechanism of the given tools the initiative belongs to credit institution since it makes a decision on obtaining or depositing of liquidity at the fixed interest rates.

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Minimum reserve requirements

The central (national) banks for controling of the total banking system liquidity also use another monetary policy instrument – reserve requirements ratio.

In order to meet the minimum reserve requirements the credit institutions attracting deposits and other similar obligations must deposit certain amount of their liability on correspondent accounts opened with the NBT. In its turn the NBT sets the ratio (interest rates) for calculation of reserve requirements.

The NBT uses differentiated interest rates on reserve requirements for deposits in national currency and deposits in foreign currency. At present, the minimum reserve requirements ratio is 3.0% for deposits in national currency and 9.0% for deposits in foreign currency.

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Foreign exchange operations

FX operations include a purchase and sale of currencies in foreign exchange markets. The operations in the FX market are conducted within the limits of exchange rate policy of the NBT and have in general two main objectives:

- to stabilize excessive exchange rate fluctuations of domestic currency, and foreign exchange market;

- to increase international reserves and to bring up their level to required international standards of international reserves stability.

The operations with foreign currency in the interbank FX market are conducted through the FX auctions, spot transactions, swap/forward operations by means of eletronic trading system.

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