KARACHI, Oct 30: The State Bank on Wednesday slightly lowered the cut-off yield on one-year treasury bills to mop up Rs37.4 billion from a not-so-liquid market.

Senior bankers said the central bank sold Rs40 billion one- year bills at a maximum yield of 6.91 per cent against the last cut-off of 6.99 per cent thus draining out Rs37.4 billion from the market. The auction of the bills had generated bids worth Rs62.7 billion at face value of which the SBP picked up Rs40 billion and rejected the remainder.

The huge bidding indicated that the banks were anticipating easing of monetary policy by the SBP.

The bankers said the weighted average yield on the bills also fell from 6.94 per cent to 6.87 per cent. They said that by selling Rs40 billion T-bills completely in line with the pre-auction target the SBP had indicated that the market should determine the T-bills rate. Previously, the SBP was not in the habit of sticking to the sale target of treasury bills.

“I think this shows a softening of the SBP stance on monetary policy,” said treasurer of a foreign bank commenting on the fall of the cut-off yield on one-year bills. Normally the cut-off of six-month bills indicate whether the central bank wants to follow an easy or tight monetary policy. But as the SBP has allowed the cut-off of one-year bill to fall following a slight decline in the maximum yield of six-month bills this has reinforced the idea that the monetary policy may be eased.

Senior bankers and economists say that a lower than targeted level of inflation combined with stable exchange rate make room for easing off the monetary policy—last relaxed in January 2002.

Consumer inflation stood at 3.79 per cent by the close of the first quarter in this fiscal year against the target of 4 per cent and the rupee gained 1.5 per cent vis-a-vis the US dollar during this period.

The fact that the private sector credit has failed to pick up pace also makes a case for softening the monetary policy stance.

Between July 1 and October 5 this year net credit disbursement to the private sector stood at minus 23 billion despite cotton financing. The government has set the target for private sector credit in FY03 at Rs94.7 billion. Economists and bankers believe that the target would slip if the current pace of credit offtake does not accelerate. “It is a sad situation,” says economist Dr. Shahida Wizarat. “One of the reasons why the private sector is not getting enough credit from banks is that the banks are still charging high lending rates,” she said when reached by Dawn over telephone.

The weighted average lending rate of all banks combined stood at 11.89 per cent at end-September substantially lower than the annual weighted average lending rate of 13.12 per cent in FY 02.

“This is still too high a rate for the private sector borrower whose cost of input has been on the rise...higher electricity and fuel charges with all their spillovers,” says Dr. Wizarat.

CROWDING OUT: Bankers say one of the reasons for the private sector not getting enough credit is that the SBP is crowding it out. They say the central bank has off-loaded a huge stock of its T-bills thus drying out liquidity from the market. The SBP sold Rs134 billion worth of T-bills between July 1 and October 5.