KARACHI, Dec 7: The weighted average yield on six-month treasury bills seems set to touch 4 per cent on Wednesday when the central bank will sell Rs30 billion bills in a not-so-liquid inter bank market.

Treasurers of local and foreign banks say that the weighted average yield on six-month T-bills may move up to 4 per cent if the central bank meets full demand for the bills in Wednesday auction.

But they say that if the State Bank decides to reject expensive bids, then the average yield may remain slightly below 4 per cent, even though they still may show an increase over the previous level of 3.74 per cent.

"We are anticipating a 25-35 basis points increase in the average yield," said treasurer of a large local bank. "But in case the central bank does not meet the sale target or if the market participation is low or the SBP rejects relatively expensive bids, then the yield may remain below 4 per cent."

In the first five months of this fiscal year, the SBP increased the weighted average yield on six-month treasury bills by 166 basis points, from 2.08 per cent in June to 3.74pc in November, as part of a gradual tightening of monetary policy to contain inflation.

This increase in the T-bills yield pushed up export refinance rate by 150bps to 3.5 per cent for December 2004 from 2 per cent in July. As a result, the export finance rate went up from 3.5 per cent to 5 per cent during this period. (Banks are free to charge a 1.5 percentage point spread over the SBP's export refinance rate while pricing export loans).

If the average yield on six-month bills rises to 4 per cent in Wednesday auction, this would push up the export refinance rate to 4 per cent for January 2005 and as a result, export finance rate would rise to 5.5 per cent. This seems a likely scenario if the State Bank keeps the export refinance rate linked with the average yield on six-month bills.

Though top central bankers say six-month T-bills yield will continue to determine the export refinance rate, the chances of freezing the refinance rate for a couple of months cannot be ruled out as the exporters are showing growing concern over frequent increase in the rate.

Some of them including Mr Dawood Usman Jakhura and Mr Shabbir Ahmed have even demanded capping the refinance rate. The former heads Readymade Garments Exporters Association and the later Bedwear Exporters Association.

They have demanded capping of refinance rate on the ground that Pakistani exporters need to keep their prices competitive to get the maximum benefit from the lifting of the textile quotas from January 1, 2005.

Mr Riaz Ahmed Tata, who in his capacity as the president of the Federation of Pakistan Chambers of Commerce and Industry is considered the chief spokesman of the private sector has also urged upon the authorities to look for ways to keep export finance rate from growing too fast.

If that means de-linking export refinance rate from the average yield on six-month bills, there is little justification for doing this, a senior central banker said adding that this would distort the interest rates structure.

Pakistan had linked the export refinance rate with the weighed average yield on six-month T-bills on the urging of the IMF to eliminate interest rates subsidy on exports.

On the other hand, keeping the yields on treasury bills unchanged seems just impossible because that can negate earlier SBP signals of tightening the interest rates to contain inflation.

Year-on-year inflation rose by 9.06 per cent in July-October 2004. The central bank is all set to further tighten the interest rates to keep inflation in check in the remaining part of this fiscal year.

OMO: The SBP siphoned off Rs10.55 billion through a one-week repo of T-bills on Tuesday at 2.47 per cent. The open market operations or OMO conducted for this purpose had generated Rs14.45 billion demand for the bills of which the central bank accepted Rs10.55 billion and rejected the rest.