KARACHI, Aug 30: The State Bank is going to sell Rs50 billion treasury bills on Tuesday-Wednesday to mop up part of the excess liquidity from the banking system. The central bank plans to raise Rs50 billion by selling three- month and one-year T-bills.

Senior bankers say banks are more interested in placing surplus funds in three-month bills because projecting interest rates movement in a shorter term is easier. The inter-bank market is surplus by about Rs15 billion. An inflow of Rs56 billion will raise this amount to Rs71 billion on Thursday - the day when SBP would pay for the bills purchased on Wednesday.

That is why senior bankers believe that the central bank may easily raise Rs50 billion without increasing the yields by a big margin. "We are anticipating a very nominal increase in the yields - certainly below 10 basis points," said treasurer of a local bank.

In the last auction the SBP had raised the weighted average yield by 11bps to 2.12 per cent on three-month bills and by 14bps to 2.83 per cent on one-year bills. This modest increase was in line with its policy to hike interest rates gradually to fight inflation without hampering prospects of higher economic growth.

Earlier in July the central bank had let the weighted average yield on six-month bills rise by 45bps to 2.52 per cent for the same reason. Also in its monetary policy issued in the third week of July the SBP had indicated clearly that it would keep raising interest rates slowly to combat inflation in July-December 2004.

All this put together indicates that SBP may allow a nominal increase in three-month and one-year T-bills yields on Wednesday. "But certainly the increase would be very nominal - a few basis points," said a dealer at foreign bank.

Pakistan plans to keep consumer inflation at 5 per cent during this fiscal year with the economy set to grow by 6.6 per cent. But the Asian Development Bank says in its latest forecast that inflation may rise to 5.5 percent.

"The real challenge before the State Bank is to manage the rise in interest rates in such a way that it does not thwart the ongoing economic recovery," says an ADB report released last week.

Bankers say that the current surplus liquidity is not evenly distributed and three major local banks claim a major chunk of it. This raises a question. Can these banks join hands to offer expensive bids for three-month and one-year T-bills in the next auction? If that happens how the SBP will meet the TBs sale target without making a substantial increase in the yields?

Some bankers say these banks cannot corner the market. "The reason is if the SBP rejects their bids then they will be left with surplus funds earning no returns," said a bank treasurer.

But why these banks cannot lend surplus funds into the inter- bank market at decent rates? "Though the liquidity surplus is concentrated the market as a whole is not short of funds," replied another bank treasurer pointing out that overnight call rate was just around 1.5 per cent on Monday.