KARACHI: The cut-off yields on treasury bills were increased by up to 34 basis points, surpassing the policy interest rate in the auction held on Wednesday.

Unlike previous auctions, bids for this auction were not as high as in the past. Experts believe that banks were confident the government would borrow on a large scale to reduce the circular debt.

The government is reportedly negotiating with banks to extend loans of up to Rs400 billion to address the ever-growing circular debt. The government is willing to borrow at 11 per cent, one percentage point lower than the policy rate, while some banks were unwilling to lend at this rate, as it is below the 12pc policy rate.

However, bankers believe the government succeeded in securing permission from the IMF to borrow this amount from banks. This was one of the reasons for the lower bids in the auction.

The total bids amounted to Rs1085bn, against a target of Rs650bn. The government came close to meeting this target, raising Rs640bn.

The highest bids, totaling Rs375bn, were for 12-month T-bills, but the government raised Rs210bn. The largest amount raised was Rs221bn for one-month papers. For benchmark six-month T-bills, Rs75bn was raised, while Rs105bn was raised for three-month T-bills.

What surprised the market was the increase in cut-off yields, which went against market expectations. Financial experts anticipate a potential cut in the policy interest rate of up to 100 basis points in the next monetary policy.

The sharp decline in inflation, which is expected to fall within the range of 1pc to 1.5pc, has widened the gap between inflation and the policy interest rate, meaning the real interest rate is above 10pc.

Despite expectations for a rate cut, lending to the private sector has been declining for the past couple of months, instead of increasing with a lower interest rate. This has led market stakeholders to anticipate an interest rate cut, but the SBP did not change the rate during the monetary policy announcement on March 10.

Some bankers believe the increase in treasury bill returns could signal a future interest rate trend. Sources in the financial market suggest that the latest Staff-Level Agreement with the IMF might bring changes to the State Bank’s policy.

A cheaper rate could lead to increased imports and destabilise the current account balance, said a financial expert, noting that the current account remains surplus in FY25. He added that economic growth would likely remain low under this policy in the current fiscal year.

Published in Dawn, March 27th, 2025