KARACHI, Oct 16: The State Bank on Thursday siphoned off Rs8.4 billion from an excessively liquid money market through repo of treasury bills for up to one month. The move that came after the scrapping of the six-month T-bills auction on Wednesday shows the central bank is making good use of its open market operation as a toll for interest rate management.

It also confirms earlier SBP signals that under no circumstances the central bank will allow banks to collude and try to push interest rates up. Allowing an increase in interest rates at this time is neither justified due to lower inflation nor desirable because the requirement for the private sector seasonal borrowing from banks is building up.

Senior bankers said the open market operation generated bids worth Rs18.6 billion but the State Bank accepted bids worth Rs8.4 billion and rejected the rest. They said the SBP accepted Rs400 million bids at 0.95 per cent for one-week repo of treasury bills; Rs5 billion bids at 0.98 per cent for two-week; and Rs3 billion bids at 1.09 per cent for four-week repo.

On Wednesday the central bank had scrapped all the bids worth Rs21.1 billion received for six-month T-bills because it felt that the banks had colluded and priced their bids at unacceptable rates. The banks had demanded 1.73-2.23 per cent yield on six- month paper against the previous cut-off of 1.65 per cent. Since the yield on six-month bill serves as a benchmark for determining the export refinance rate it is regarded more sensitive than the yield on other tenures of T-bills. That was one reason why the SBP had to scrap the whole auction because had it stuck to the sale target of Rs10 billion the yield on six-month bills would have gone up to 1.78 per cent pushing the export refinance rate in its wake.

For this month the export refinance rate is 1.5 per cent and the maximum spread the banks can charge is also 1.5 per cent. Thus eligible exporters are getting export loans at 3 per cent. If this rate moves up the exporters will find it difficult to increase exports. Pakistan has set an export target of $12.2 billion for fiscal year July-June 2003-04.

Another reason why the SBP had scraped the Wednesday auction was that it did not want to signal the market that there is any move in the making for tightening the current loose monetary policy.