KARACHI, Sept 20: The State Bank may have to call bids for the treasury bills only in one tenure in the next couple of auctions to check unrealistic bidding and be able to keep excess liquidity taking a toll on inflation.

Sounds all Greek? It is simple: The central bank may now offer for sale the treasury bills of only one tenure—most probably six months. Normally it offers for sale the treasury bills of six- month; three-month and one-year maturity.

The reason? “The reason is that the SBP wants to refrain banks from speculative bidding,” explains a source close to the State Bank.

But what speculative bidding is? In the past few auctions the banks have submitted bids to buy treasury bills without having cash in their tills. “Such bids are speculative in nature because they give a wrong indication about the liquidity available in the market.”

The SBP has come to the conclusion that many banks were forced to come up with “highly speculative bids” because they were not sure whether the SBP would sell six-month bills and reject those of three-months and one-year or vice versa.

In the recent auction held on Wednesday the banks did come up with total bids of about Rs 75 billion against the pre-auction sale target of Rs 16 billion only including Rs 34.15 billion bids for six-month bills only. The SBP accepted Rs 27.15 billion bids for six-month bills at 6.39 percent thus draining out Rs 26.3 billion from the inter-bank market. This high bidding exercise was not a stray case. In earlier auctions also the banks had come up with much larger bids than the target set for T-bills auction.

On all such occasions the central bank was forced to mop up more liquidity from the market then targeted. So in effect it seemed that the regulators and the market players were playing hide and seek. It was difficult to determine which side brought this vicious circle in motion. But the end result was that the SBP was running out of its stocks of T-bills to mop up higher than targeted liquidity from the market. The trend may continue unless the State Bank finds a way out.

“This a precarious situation,” says a source close to the SBP. “The SBP ability to sell T-bills is limited. If its stocks of the bills dry up there will be a chaos in the market,” he says adding that the stocks have already depleted in the past two and a half months.

But how? “If the SBP does not have enough T-bills to use for mopping up excess liquidity from the market the market will naturally remain excessively liquid,” explains a source close to SBP. “Lending rates will fall steeply...and inflation will shoot up.”

Concern about a possible rise in inflation makes it necessary for the SBP to send signals of interest rate stability in the market. But speculative bidding is making this difficult for the central bank. In the past two auctions of T-bills the SBP had to lower the cut-off yield on benchmark six-month bills by two basis points each time in its attempt to mop up excess liquidity from the market. The SBP had to do this despite the fact that it does not want to signal any rate-cut in the near future. “We simply cannot,” says a senior central banker.