KARACHI: The government has slashed the cut-off yields of treasury bills by up to 56 basis points, reinforcing market expectations for a significant reduction in the State Bank’s policy rate on July 29.

The government also raised its target amount over three times in the latest auction, securing Rs481 billion against a target of Rs150bn. The auction attracted total bids of Rs1.793 trillion, with the highest bids of Rs1.025tr received for the benchmark six-month T-bills.

For the three-month T-bills, the government cut the rate by 56 bps to 19.49 per cent, raising Rs72bn. The six-month tenor saw a rate reduction of 50 bps to 19.29pc, bringing in Rs207bn. The 12-month papers saw a rate cut of 30 bps to 18.24pc, raising Rs142.3bn.

Returns slashed by up to 56 bps; Rs481bn raised against Rs150bn target

The policy interest rate currently stands at 20.5pc, suggesting a potential rate cut in the upcoming monetary policy review on July 29. Surveys conducted by brokerage houses indicate that most respondents expect a rate cut of up to 100 bps, with over 30pc anticipating a 150 bps reduction.

This significant borrowing reflects the government’s increasing financial needs. In the previous fiscal year (FY24), the government set a record for borrowing from banks, a trend expected to continue this fiscal year.

Bankers believe that despite expecting to generate 40pc more revenue this year, compared to the 30pc increase in FY24, the government is likely to continue borrowing from banks to manage massive debt servicing and capacity payments to independent power producers.

Meanwhile, industries, including exporters, have been voicing concerns over the tax-loaded budget and high electricity prices, calling for the interest rate to be reduced to 14pc, given that inflation fell to 12.6pc in June.

The decline in T-bill rates has bolstered hopes among economic stakeholders for a government-induced boost to economic growth. Some analysts predict that the interest rate could be slashed by up to 6 percentage points by the end of FY25.

Throughout FY24, the interest rate remained at a record 22pc, deterring private sector borrowing and contributing to a modest economic growth of 2.4pc. The growth projection for FY25 stands at 3.5pc.

Published in Dawn, July 25th, 2024