KARACHI, Sept 15: Banks and development finance institutions or DFIs made more than Rs90 billion investment in treasury bills during April-June 2005, the last quarter of the outgoing fiscal year, as the yields on the bills moved up.

The State Bank, in its fight against inflation, raised the weighted average yields on all the three tenures of T-bills during April-June 2005, attracting more investment in the bills by the banking system, data released by the SBP show. Total investment of banks and DFIs into T-bills rose to Rs421.7 billion at end-June from Rs331.6 billion at end-March this year, showing an expansion of Rs90.1 billion.

The banking system chose to make such a huge investment in the government securities because of rising yields on the same. The SBP raised the weighted average yields on three-month and six-month TBs by 254 basis points and 244 basis points to 7.48 and 7.94 per cent respectively during April-June 2005. It also had to raise the average yield on one-year bills by 268bps to 8.40 per cent during this period to ward off inflationary pressure. In first three quarters of the last fiscal year also, the central bank had raised TBs yield but it increased the yields on TBs much faster in the last quarter to contain soaring inflation. Inflation in the last fiscal year, however, closed at 9.28 per cent against the initial forecast of five per cent.

The central bank became aggressive in monetary tightening after increasing its discount rate by one and half a percentage points to nine per cent on April 11. This was the first upward revision of the SBP discount rate after seventeen months and the central bank had to reinforce the signal given through this increase by making faster-than-before increases in the treasury bills yields.

Quick upward revisions in TBs yields attracted more investment in TBs by the banking system that was awash with liquidity and demand for private sector loans during April-June was not as big as in the previous quarter. What else induced the banking system to make a big investment in TBs was that the stock market was struggling to come out of the mid-March crisis making it difficult for the banking system to increase investment in shares. The KSE 100-share index, after hitting an all time high of 10303 points on March 15 had begun to fall and at the end of June it stood at 7450.

Whereas banks invested heavily in TBs during April-June quarter, their investment in Pakistan Investment Bonds showed a downward trend, notes a State Bank report released recently. Whereas the share of TBs in total investment portfolio of the banking system rose to 64.9pc at end-June from 58.2pc at end-March 2005, the share of PIBs shrank to 25.1 per cent from 29.5 per cent. This happened as the previously issued PIBs matured but the government did not auction fresh PIBs to avoid a sharp increase in their yields, in line with the rise in TBs yields.