KARACHI, April 16: The treasury bills auction due on Wednesday is sure to attract much larger bids than the sale target of Rs3 billion. Senior bankers say this may pose a problem to the State Bank in reinforcing its earlier signal of interest rate stability if the bid prices are higher than expected.

“We expect the bids to be around three times the sale target,” said treasurer of a local bank. He and some other bankers reached by Dawn over telephone said that the market was surplus by Rs4-6 billion on Tuesday adding that the figure may rise on Wednesday.

Bankers say most banks are keeping more than 4 per cent of their deposits in mandatory cash reserves as the market is long adding that they may take out part of this amount to invest in T bills.

Senior bankers say if the banks come up with much larger bids than the sale target on Wednesday then the SBP may find it difficult to keep the cut-offs of T-bills unchanged if it decides to sell more than targeted bills. In other words the State Bank may have to raise the cut-offs to mop up maximum liquidity. “Here lies the problem,” says a foreign banker.

“For the past few weeks the SBP has been signalling stability in interest rates. Increasing the cut-offs may discontinue this process,” he says.

But a source close to SBP says much would depend on the pricing of the bids. “Those who say that the SBP will have to increase the cut-offs to mop up more than targeted liquidity are assuming that the bid prices would be higher...but this is an assumption.”

In other words the State Bank is hoping that increased level of liquidity in the inter-bank market may eventually drive banks to price the bids reasonably allowing the SBP to breach the sale target without necessarily increasing the T-bills cut-offs. “But that again is an assumption,” says treasurer of a foreign bank.

Senior bankers say since an outflow of Rs6.3 billion is due from the system on Thursday the SBP may also find it practical to stick to the T-bills sale target of Rs3 billion on Wednesday if mopping up more than targeted amount means increasing the cut- offs undesirably. On Thursday last the SBP had injected Rs6.3 billion into the then cash-starved money market but the injection was too little to fill the liquidity gap.

Bankers say if the SBP decides to stick to the T-bills sale target of Rs3 billion on Wednesday and even if the bid prices are not very expensive then the central bank may have to reject the bids received for one or two tenures.

The State Bank has invited bids for T-bills for three months, six months and one-year. Senior bankers say aggressive bidding is likely in three month and six month tenures.