KARACHI, April 27: After making way for a modest increase in treasury bills yields in the past few auctions, the State Bank is now jealously guarding against a further rise ahead of the 2004- 05 budget.
The financial market picked up this clue on Tuesday when the central bank sold only 20 per cent of the targeted amount of T- bills at a regular auction. It sold Rs1 billion six-month bills against the target of Rs5 billion to maintain the cut-off yield unchanged at 1.84 per cent.
But it could not stop the weighted average yield move up by four basis points -from 1.80 to 1.84 per cent. The market was interested in buying Rs7.6 billion worth of bills. Senior bankers said had the SBP met the auction target the cut-off yield would have risen to 1.92 per cent.
By keeping the yield unchanged the central bank signalled that for the time being it wants to hold six-months T-bills rates stable. Sources close to SBP say the central bank did this to show that it was in no hurry to prepare grounds for tightening of monetary policy to check inflation.
They say another reason for the move was to leave the market liquid enough to participate in a big way in the coming auction of long-term bonds. The SBP plans to sell Rs25 billion long-term Pakistan Investment Bonds on Wednesday.
Though the cut-off yield on six-month bills remained intact in Tuesday auction, a nominal increase of four basis points in their weighted average yield is in continuation of the past trend.
Since February 12 this average yield of six-month bills has seen an increase of 17 basis points in four instalments. But bankers say this is not enough to push up in May the export refinance rate that has remained unchanged at 1.5 per cent since August 2003. The weighted average yield serves as a benchmark for export refinance rate.
Since the banks are allowed to charge a maximum spread of 1.5 per cent on export refinance rate while pricing their own markup for offering export finance to eligible exporters they have been receiving export finance at 3 per cent.
Since the SBP managed to keep the cut-off yield on six-month bills unchanged by missing 80 per cent of the sale target chances are that it may not hold the yield stable for quite a long time.
What makes this a strong possibility is the fact that monetary assets have been growing too rapidly and the growth is stemming particularly from increasing volumes of currency in circulation.
The latest State Bank data shows that monetary assets or M2 grew by a huge 13.16 per cent between July 1, 2003 and April 10, 2004 against the full fiscal year July/June 2003/04 target of 11.06 per cent. Currency in circulation shot up by 20.7 per cent during this period against 14 per cent in full fiscal year July/June 2002/03.
This fast-paced growth in M2 particularly in currency in circulation is taking its toll on the priceline. CPI inflation or inflation measured by consumer price index rose 3.7 per cent year-on-year in nine months to March 2004.
The government wants to keep it at 4.2 per cent at the end of the fiscal year in June. That is possible only if the pace of growth of M2 particularly of currency in circulation slows down. Allowing the treasury bills rates to rise slightly is one of ways to make this happen.
