KARACHI: Falling inflation has forced banks to rush for higher investment in the government papers of longer tenor, but the State Bank of Pakistan decided to stick to its target for treasury bills (T-bills) while again slashing cut-off yields on Wednesday.

The main inflation, Consumer Price Index (CPI), has changed the entire scenario for the investors since the SBP has been regularly cutting the rates on the government papers.

The banks still find the option safe and attractive.

The CPI fell to just 2.5 per cent which is reported as 11-year low. It has significantly increased the real interest rate to 5.5pc in March, a highly attractive position for the economic growth in the country.

However, the private sector has yet to enter the banking system in a big way. The credit offtake has actually dropped compared to last year despite substantial reduction in the interest rate.

The government has been reducing the interest rate on its papers since November 2014. The cut-off yields on three-month, six-month and 12-month T-bills have been reduced by 149 basis points (bps), 155bps and 166bps since then.

On Wednesday, the banks offered Rs228 billion to invest mostly for 12-month and six-month papers but the government picked up just Rs79bn while large amount of Rs57bn was invested for the benchmark six-month T-bills.

The cut-off yields were reduced by 4bps and 23bps for 6-month and 12-month T-bills respectively compared to the last auction held on March 18.

Meanwhile, the government has announced to raise Rs1.1 trillion through auction of T-bills during the fourth quarter (April-June) of this fiscal year. Also, the government will raise Rs150bn through the auction of Pakistan Invest­ment Bonds (PIBs) in the same quarter.

The government, during the last 20 months, has massively sold long-term PIBs to raise liquidity.

The maturity amount of PIBs in the last quarter of 2014-15 estimated at Rs5.8bn while the government will raise additional Rs144bn in the same quarter providing good chance for the investors to buy for high-yield risk-free PIBs.

Published in Dawn, April 2nd, 2015

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