October 18, 2001	Thursday	Rajab 30, 1422

KARACHI, Oct 17: The State Bank on Wednesday cut maximum yield on six-month and one-year treasury bills for the second time during this month. This reinforces an earlier SBP signal that it wants to keep banks reasonably liquid in the months to come.

The SBP slashed the cut-off yield by 11 basis points to 10.28 per cent for six months and by 5 basis points to 10.74 per cent for one year. The central bank said it sold Rs3.5 billion T-bills at the reduced cut-offs and sucked in Rs3.2 billion from the banking system.

In a subsequent move the SBP also injected Rs7.3 billion in the inter-bank market through one week reverse repo of T-bills at 9.8 per cent. Bankers said the slashing of the yield on T-bills coupled with timely injection of funds reinforces earlier SBP signal that it would keep the market reasonably liquid. Banks need enough liquidity to meet rising demand for private sector credit and to finance withdrawals that are likely to go up.

Demand for private sector credit starts picking up in October with cotton financing in full swing and continues through March.

And pre-Eid withdrawals from the banking system begin in mid Shaban — the Islamic month falling before Ramazan—and continue throughout Ramazan. Shaban would be starting from Thursday or Friday.

Besides there is an added reason for keeping the banks liquid. Banks are already facing liquidity crisis due to withdrawals that started in the wake of September 11 terrorist attacks on New York and Washington. Though the pace of such withdrawals has slowed, banks are still unable to cope with the liquidity crunch created thereby.

The SBP has been injecting liquidity but these small one-week injections too have not provided enough relief to cash-strapped banks. Some of them have constantly been discounting government securities to meet cash reserves requirement and to finance their day to day operations. Overnight call rate has remained closer to SBP discount rate of 12 per cent after September 11 though it has fallen occasionally below 10 per cent due to injections made by the SBP.

The cuts made in T-bills yield on Thursday is the second one in row within this month. On October 3 the SBP had slashed the yield on six-month and one-year T-bills by 12 basis points and 7 basis points respectively. It had also cut the yield on three-month bills by 18 basis points to 10 per cent.

Bankers say since the exchange rate has remained stable after September 11, the SBP has a relatively free hand in managing liquidity levels by making modest cuts in T-bills yield.

In the past one month the SBP has cut the yield on T-bills by 20 basis points for six months and by 13 basis points for one year.

The rupee has risen by 3.2 per cent against the US dollar in the inter-bank market after September 11 mainly due to larger selling of export proceeds and smaller buying by the importers.