0
KARACHI, March 6: The State Bank on Wednesday signalled again that it wants to keep the monetary policy stable by keeping the cut-off yields on treasury bills unchanged.
Top bankers said the central bank wanted to keep the monetary policy stable to avoid speculative attack on the rupee. “The SBP is preparing grounds to contain exchange rate volatility that may hit the market once the rupee is allowed to find its real worth,” said the treasurer of a major foreign bank.
The SBP kept the cut-off yields on treasury bills unchanged at 5.81 per cent for three months; at 6.48 per cent for six months and at 7 per cent for one year. This was for the second time that the central bank kept the cut-offs unchanged. Earlier on February 21 the SBP had maintained the cut-offs at the previous levels but it had let the weighted average yield move up by 52-74 basis points.
The central bank did the same thing on Wednesday and allowed 08-45 basis points increase in the weighted average yield of the T-bills of different tenures. The SBP mopped up Rs11.39 billion through sale of T-bills against the target of a little less than Rs7 billion. The auction of the T-bills had generated total bids worth Rs16.88 billion. Senior bankers said the mopping up of more than targeted amount had left the market poorer and might force cash-strapped banks to resort to discounting on Thursday.
SBP raised Rs5 billion by selling three-month bills; Rs 5.4 billion by selling six-month bills and Rs 934.7 million through sale of one-year bills at weighted average yield of 5.81 per cent; 6.46 per cent and 7 per cent respectively.
At the previous auction of T-bills held on February 21 the SBP had kept weighted average yield on six-month and one-year bills at 6.38 per cent and 6.90 per cent. Earlier on February 7 it had maintained the weighted average yield on three-month T-bills at 5.81 per cent.
“It is the cut-off yield that has not changed in the last two auctions and as such signals a stability in the monetary policy,” said treasurer of a state-run bank. “The weighted average yield has risen in the meantime but that does not mean that the SBP is going to further tighten the monetary policy.”
Senior bankers said the SBP had to raise the weighted average yield in the last two auctions just to keep the cut-offs at the desired levels.
EXCHANGE RATE STABILITY: These bankers said that the stability of the monetary policy is crucial now to contain volatility of the exchange rates that might have occurred long before had the SBP not been providing cushion to the dollar.
The SBP made heavy dollar buying from the inter-bank market in the past five months to stop it falling to unmanageable lows in the wake of a dramatic increase in foreign exchange inflow after September 11. Despite that the dollar has registered a more than 6 per cent fall against the rupee since then.
“But now the rupee seems to be a little overvalued,” said the treasurer of a leading foreign bank adding that the real worth of the rupee should be around 60.50-61.00 per dollar. He said that by keeping the monetary policy stable the SBP is preparing ground for letting the rupee finds it real worth without showing much of volatility.
But economic managers including Finance Minister Shaukat Aziz say the rupee is rather undervalued and admit openly that the SBP is holding the dollar firm to benefit exporters.
LENDING RATES: Senior bankers said that another rationale for keeping the monetary policy stable is that the SBP wants banks to cut their lending rates further. In the first six months of this fiscal year (i.e. July-December 2001) banks slashed the weighted average lending rates by a single percentage point to 13.41 per cent in response to four per cent reduction in the SBP discount rate and an even greater cut in the T-bills rate.
Senior bankers say since inconsistent monetary policy signals had made it difficult for banks to make timely cuts in lending rates in the past the SBP move to stabilize these signals should help banks make more cuts in their lending rates.
