KARACHI, July 12: The State Bank on Monday mopped up over Rs50 billion from an excessively liquid inter-bank money market to set the stage for the auction of six-month treasury bills next week.

The central bank sucked in Rs50.5 billion through one-week repo of treasury bills at one per cent at an open market operation (OMO) held for this purpose, against a demand for Rs53.05 billion, bankers said.

They said that the outflow of Rs50.5 billion from the system would help the SBP keep the yield on six-month treasury bills from rising sharply in an auction due next week.

"The SBP wants to make banks desperate for buying T-bills (by reducing the level of liquidity in the inter-bank market). So that they do not demand an unacceptably higher yield on the bills," said a foreign bank's dealer.

Last month, the State Bank had rejected all bids worth Rs41.6 billion received for six-month treasury bills to avoid increasing their yield by a big margin. Thus, the weighted average yield on six-month bills remained unchanged at 2.23 per cent.

The central bank still wants to keep this rate from rising sharply because an increase in it will automatically push up export refinance rate, making export loans dearer for the exporters. Besides, it would signal to the market a rather fast upward adjustment in the interest rates, contrary to its stated policy of adjusting the rates gradually.

An increase in six-month T-bills rate in May had pushed the export refinance rate higher by 50 basis points to two per cent in June. The same rate is operative in July also and exporters are getting export loans at 3.5 per cent as they are allowed to charge a maximum of 1.5 per cent margin over the export refinance rate.

But on the other hand, the central bank needs to allow a moderate rise in treasury bill yields to keep inflation in check. This makes the next auction of T-bills quite interesting.