KARACHI: The State Bank of Pakistan on Friday injected Rs375 billion into the banking system to ease the liquidity crunch.

The impact of the crunch was also visible in the currency market where the dollar has been losing weight against the rupee due to falling demand and selling of greenbacks by some banks to generate liquidity.

The SBP reported that Rs375bn was injected for seven days at the rate of 9.37pc, slightly less than the discount rate of 9.5pc.

Shortage of liquidity emerged mainly due to heavy investment of banks in long-term government papers to earn more than the prevailing rates on other products.

On Wednesday, the auction of treasury bills reflected shortage of liquidity in the banking system. The banks offered Rs67bn and the State Bank picked up the entire money; however, the target for the auction was Rs100bn.

Banks invested Rs58bn in 12-month papers while Rs9bn and Rs3bn in six and three-month papers.

“In the wake of falling inflation, there is no doubt that the interest rate may see another cut next month which tells bankers to invest a maximum amount in long-term papers,” said a senior banker.

Though the rates of Pakistan Investment Bonds (PIBs) were reduced in the last auction held on Nov 19, the PIBs were still attractive with the cut-off yield of 10.89pc, 11.1pc and 11.99pc for three, five and 10-year bonds, respectively.

This higher attraction of PIBs practically crowded out the private sector as advances to the sector were just Rs95bn at the end of the first five months of the current fiscal year.

Bankers said that the banking spread, which fell to nine-year low this fiscal year, was another reason of higher attraction of PIBs and other government papers.

Some bankers were of the view that the government may not need more money like the previous fiscal year because of higher influx of dollars and improvement in revenue collections.

So far, the government has not borrowed from the central bank; instead net retirement of debt was noted till the end of November. The government had borrowed Rs457bn in the five months of last fiscal year.

In the currency market, the dollar was traded at Rs100.80-85. Currency dealers said the tight liquidity position of banks was forcing them to sell dollars to generate liquidity which ultimately curtails dollar demand.

Published in Dawn December 13th , 2014