July 11, 2002	Thursday	Rabi-us-Sani 29, 1423

KARACHI, July 10: The State Bank has sent a very strong signal to the market that it wants to keep the monetary policy stable — and as such no cut in discount rate or T-bills rate are on the cards.

The SBP dropped this signal by keeping the cut-off yields on treasury bills unchanged. But in doing so it had to suck in an all-time high Rs66 billion against the sale target of Rs20 billion from a not-too-liquid money market.

“That is why we are expecting a huge discounting of more than Rs30 billion on Thursday,” said treasurer of a large local bank. He said the reason why the banks submitted much larger bids than the actual liquidity available in the market was that they wanted to invest more money at better rates hoping that the rates will be cut soon.

Since mid-June the financial market has been expecting a cut in SBP discount rate and T-bills rate in the light of the budget speech of Finance Minister Shaukat Aziz in which he hinted at a possible rate-cut.

“The SBP tried to give a signal about our stance on monetary policy also in the last auction of T-bills but it was largely ignored,” said a source close to the central bank. “So we had to reinforce it today by keeping the T-bills yield unchanged...and to do so we had to accept a very large amount of bids,” he added.

The SBP had received Rs70 billion worth of bids for T-bills of different maturity of which it accepted Rs69.2 billion at discounted rates thereby draining out more than Rs66 billion from the system.

“The market had a surplus liquidity of not more than Rs30 billion,” estimated a source close to the central bank. “So on Thursday (when the settlement of T-Bills auction is due) the market would turn to the SBP discount window to make overnight borrowing. That borrowing would not be less than Rs30 billion.”

Banks borrow money for up to three days from the central bank against government securities at a fixed rate to meet temporary shortfalls in liquidity. This is called discounting. Currently SBP discount rate is 9 per cent — unchanged since mid-February.

The central bank started easing off the monetary policy since July 2001 and it cut the discount rate by five per cent and T- bills rates by more than six per cent between July-February to give boost to the sagging economy.

The SBP on Wednesday sold about Rs34.4 billion worth of six- month bills at a cut-off of 6.43 per cent and Rs34.2 billion one-year bills at 6.99 per cent. The central bank also sold Rs700 million worth of three-month bills at 5.8 per cent. “Had the SBP not maintained the cut-offs in all the three tenures the market expectation of rate-cut would not have been completely dashed,” observed treasurer of a foreign bank.