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KARACHI, Oct 27: The State Bank is going to keep banks liquid ahead of November 4 auction of the long-term Pakistan Investment Bonds to block cartel-making by some banks to push up yields.
“We are creating a situation where it becomes difficult for the banks to make cartel and force their way on the yield structure,” said a SBP official whose responsibilities include watching the market behaviour. What matched these words of the central banker who declined to be named was the State Bank decision to leave enough money with the banks before the bonds auction.
The State Bank announced on Monday that it would sell three-month and one-year treasury bills of Rs45 billion on Wednesday. “This means the central bank will still leave Rs18 billion in the banking system because the bills auction is being held ahead of a Rs63-billion inflow,” said treasurer of a local private bank. The market will get Rs63 billion inflow on Thursday as the previously sold treasury bills of the same amount will mature that day.
THE PURPOSE: One simple reason for leaving enough liquidity in the banking system is to keep the banks comfortable during Ramazan when depositors line up for withdrawing money for pre-Eid purchases. But another reason is that the State Bank and also the government do not want to raise yields on the PIBs too sharply because that could be misinterpreted as a prelude to tightening of the monetary policy.
Enough liquidity available with the banks would refrain them from making unrealistic bids for the bonds demanding high yields. In the last auction of the bonds held on October 4, the State Bank had disallowed a sharp increase in the bonds yield — but in doing so it had to miss the auction target by a large margin. The State Bank had sold only Rs7.59 billion PIBs against total bids of Rs38 billion and against a pre-announced target of Rs25 billion.
But the bids were so priced that even while selling only one- third of the target amount of the PIBs the SBP had to increase the yields by 58 basis points on 10-year bonds; by 85bps on five-year bonds and by 93bps on three-year bonds.
STABLE RATES: At the root of this hide-and-seek game the banks and the central bank have been playing for some time is the SBP declared policy to keep the interest rates stable. Obviously, then the SBP does not want to allow a sharp increase in yields on the T-bills or the PIBs. Central bankers say banks make cartels and come up with expensive bids for the T-bills and the PIBs for earning higher yields.
THE OTHER SIDE: But arguments are growing stronger for upward revision in the interest rates. Senior bankers say the central bank will soon have to make further upward adjustments in the interest rates structure — even if its discount rate, which it says is the anchor of the monetary policy, remains unchanged. Many top bankers say (but they do not go on record for obvious reasons) that it is not their cartel-making, which is pushing up yields on the T-bills and the PIBs.
“The yields on T-bills and PIBs have been on the rise due to market-forces,” said head of treasury of a local bank. Bankers say there seems to be a contradiction of sort in the SBP policy of disallowing a higher-than-desired increase in yield on the PIBs and its stated desire to desist the banks from holding bonds stocks.
The bankers say if the SBP wants the banks to refrain from holding the PIBs and sell them in the secondary market instead its policy of blocking a rise in their yield by missing the auction target may prove frustrating.
Corporate buyers of the bonds say the same thing: “We did not participate in the October 4 auction of the PIBs because we wanted to see if the yields are going to rise,” said a senior executive of State Life Insurance Corporation — one of the largest buyers of the PIBs. He declined to comment on whether the corporation will go for buying the PIBs next month. “It is premature to say...though the yields did rise in the last auction we are still assessing how the next auction may shape up,” he said. His remarks imply that the corporation is evaluating things to have an idea of whether the SBP would allow further rise in the PIBs yield or would it try to keep them stable.
GOVERNMENT BORROWING: Many in the banking sector say that the central bank will have to allow further increase in the PIBs yield — compromising on its desire to keep the interest rates stable — particularly if it sticks to the auction target. The SBP is to sell Rs13 billion PIBs on November 4 — even if it does not include the leftover of the October 4 auction. Senior bankers say since the government borrowing from the banking system has reached Rs43 billion in the first quarter of this fiscal year against the full year target of Rs15.8 billion, it will have to bring it down. The government can do this by increasing its non-bank borrowing. And it cannot increase its non-bank borrowing unless it allows a rise in the PIBs yield to attract non-bank buyers — the likes of SLIC and NIC etc. — and refrain from making further cuts in the rates of return on the national saving schemes. Bankers say a rise in the PIBs yield will automatically help the government avoid deeper cuts in the rates of return on the NSS because the latter is tied up with the PIBs yields.
The government’s non-bank borrowing through the NSS has remained negative in the first two months of this fiscal year and one of the reasons for this is that it had lowered the rates of return on them in July. In July-August, the NSS saw a net withdrawal of Rs2 billion plus.
