June 12, 2003	Thursday	Rabi-us-Sani 11, 1424

KARACHI, June 11: The market tends to believe the words coming from the horses mouth. So when banker-turned Finance Minister Shaukat Aziz says that low interest rate policy will continue bankers believe him.

This reality came to the fore on Wednesday when bankers priced their bids for one-year treasury bills at very low rates. Several of them reached by Dawn said they were inspired by the statement made by the finance minister — and also had enough liquidity with them. The result: the cut-off yield on one-year T-bills fell 30 basis points as the State Bank sold Rs26 billion worth of these bills. But an SBP source said this fall in the cut-off was not indicative of further loosening of the monetary policy.

Bankers said the SBP accepted the bids for one-year T-bills at a maximum yield of 2.37 per cent down 30bps from the last cut-off of 2.67 per cent and siphoned off Rs25.4 billion from the banking system.

Senior bankers said the yield on one-year paper fell as most banks including the giant National Bank having excess liquidity came up with large bids tagged with demands of low yields. “That had to happen,” said treasurer of a foreign bank linking this to the fact that the central bank had set a very low auction target.

State-run National Bank beat all the banks in pricing its bids for the one-year bills. Out of the Rs26 billion bids accepted by the SBP, Rs24 billion bids were of NBP—and the rest of Citibank.

Bankers said the auction target of Rs25 billion set for three -month and one-year T-bills was significantly lower than the actual inflow of Rs32 billion through maturity of previously sold bills.

Besides, there was another inflow of Rs15 billion in the shape of maturity of a repo sale of T-bills by the central bank at an open market operation held earlier this month. Thus there was a total inflow of Rs47 billion in the market—and there had already been a surplus of Rs8 billion in the market. In other words the SBP set an auction target of Rs25 billion for T-bills—and also stuck to it—when the banking system was long by not less than Rs55 billion. That explains the aggressive bidding by the banks.

SBP said in a statement that it received total bids worth Rs75.5 billion—Rs70.2 billion for one-year T-bills and Rs5.3 billion for three-month bills. Of this it accepted Rs26 billion bids for one-year and ignored the rest.

SIGNAL: An SBP source said the fall in one-year T-bills rate simply mirrored the huge liquidity available in the market. “It is not a signal (about any change in the monetary policy stance),” he said.

SBP made last cut in its discount rate in November 2002 and has since been following a stable monetary policy. The discount rate still intact at 7.5 per cent has become irrelevant as the gap between this rate and T-bills rate has widened after sharp cuts in T-bills rates. The cut-off yield on six-month and one- year T-bills are at 1.8 per cent and 2.3 per cent respectively.