KARACHI, Sept 27: The State Bank is going to sell Rs60 billion three-month and one-year treasury bills on Tuesday-Wednesday.

Senior bankers say that the central bank may easily meet the sale target. The reason is that the auction of the bills is being held against a huge inflow of Rs86 billion on Thursday, when the settlement of the auction will take place.

Bankers say that currently the market is short of liquidity by at least Rs10 billion and the liquidity crisis may deepen towards the end of the month on transfer of government taxes collected by banks to the SBP account.

This is one of the reasons why the central bank has set the T-bills sale target at Rs60 billion against the inflow of Rs86 billion, thus ensuring that the market does not get more than usually tight at the end of this quarter.

During the last week, the inter-bank market remained short of liquidity as SBP battled to keep the rupee stable. The banks did borrow overnight funds throughout the first five days of the week and the amount of such borrowing, at a high discount rate of 7.5 per cent, totalled Rs68 billion.

The rupee lost 35 paisa or about 0.6 per cent of its value in the first four days of the last week but finally recovered 22 paisa on the fifth day that reduced its total loss to 13 paisa a US dollar during that week. Had the central bank not kept the inter-bank market short of rupee liquidity, the local currency would not have been able to show such a big and quick recovery.

Senior bankers say that in the T-bills auction to be held on Tuesday-Wednesday, banks would participate in a big way but despite that the yields on the bills would rise further.

"We expect a 30-35 basis points increase in the T-bills yields," said treasurer of a large local bank. Treasurer of a big foreign bank also estimate a similar rise in the yields.

A source close to the State Bank said the central bank would certainly reinforce its earlier signals of measured and gradual hiking of interest rates through the next auction of T-bills but he said it was too difficult to estimate the quantum of increase in their yields.

After the close of the last fiscal year on June 30, the State Bank has raised the weighted average yield on three-month and one-year bills by 53bps and 78bps respectively to 2.23 and 2.97 per cent in three instalments. It has increased the weighted average yield on six-month bills by 93bps to 3 per cent, also in three instalments.

A key consideration for increasing the T-bills rate during this fiscal year is to contain inflation that rose by 9.29 per cent year-on-year in July-August 2004, indicating that the full fiscal year inflation may rise far beyond the targeted 5 per cent. This fast-paced rise in inflation has alerted the monetary authorities and they are trying to contain it through gradual hiking of interest rates.

On the other hand, the government is trying to raise supply of food items, supplemented also by imports, to rein in food inflation that shot up by 14.35 per cent in July-August 2004 and was the major contributor to a big 9.29 per cent increase in consumer inflation in the first two months of this fiscal year.

The decision of importing a million tons wheat is part of this strategy. But observers say that the impact of monetary measures coupled with efforts to raise supply of food items on rising inflation would be offset to a great extent by record increase in world oil prices.