June 19, 2008	Thursday	Jamadi-us-Sani 14, 1429

KARACHI, June 18: The State Bank of Pakistan increased on Wednesday the cut-off yield on treasury bills of all the three maturities.

Market experts said the SBP move was expected after the increase in the discount rate. The benchmark six-month T-bills rate went up to 11.49 per cent from 11.24 per cent.

Primary dealers said it was not a big jump in the cut-off yield, but it reached just close to discount rate. Only last month, the SBP increased the discount rate by 1.5 per cent to 12 per cent.

The higher return on T-bills has produced attraction for both local as well as foreign investment.

The rate of return on government papers is significantly higher in Pakistan as compared to other papers in the world market.

“The return of 11.49 per cent on T-bills is much higher than the prevailing interest rate on the world market which is around 4 to 7 per cent,” said a senior banker.

He was of the view that the interest rates were increased deliberately to attract investment, including foreign investment. Foreign portfolio investment witnessed poor situation as outflow remained higher than the inflow.

However, the high rate of inflation is another factor for the higher interest rate.

The finance minister in his budget speech announced that 12 per cent inflation (CPI) would be maintained during the next fiscal 2008-09.

The State Bank also increased cut-off yield on both three and 12-month T-bills. The cut-off yield on the 12-month T-bills rose to 11.73 per cent from 11.48 per cent while yield on the three-month paper reached 11.41per cent, up from 11.23 per cent

The SBP sold six-month bills worth Rs312 million, 12-month bills worth Rs2.82 billion and three-month papers worth Rs12.06 billion.

The SBP has set a pre-auction target of Rs20 billion and received bids worth Rs18.63 billion which the market experts said was a positive response.

The SBP had failed to sell T-bills before this increase of interest rate.

One of the reasons for increasing discount rate, which ultimately increased return on T-bills, was low return.

This was frustrating for the SBP as stock of T-bills was rising since the government was borrowing from the State Bank on behalf of T-bills.

The SBP sells T-bills to commercial banks and lend this amount to the government.

While the government borrowed over Rs600 billion from the SBP during the current fiscal, the stock of T-bills also rose to Rs350 billion during 11 months.

“The higher return on T-bills indicates that the announced government papers of three, six and 12-month maturities would carry higher interest rate than the T-bills,” said the senior banker.

The government has announced that it would launch papers to mobilise deposits instead of borrowing from the State Bank which is inflationary in its nature.