KARACHI: Banks continued to invest heavily in government papers as the cut-off yield on the three-month treasury bills was again increased by four basis points to 9.95 per cent in the auction held on Tuesday, an indication that interest rate would see a change.

The cut-off yield reached close to prevailing discount rate of 10pc per annum.

It was the third T-bill auction since November 27, 2013 and the government raised Rs392 billion. Commercial banks parked Rs391bn, which was 97 per cent of the total bid amount, in three-month papers. A meagre sum of Rs1.2bn was invested in six-month papers at the cut-off yield 9.97 per cent. No bids were received for 12-month bills.

The government has been increasing the cut-off yield on this short-term treasury bills. In the last auction, cut-off yield on three-month papers was increased by 5 basis points to 9.91pc.

While inflationary pressure mounted to give a push to the interest rate, the sudden increase in government borrowings from commercial banks is also going to set new records. Since November 27, the government collectively borrowed about Rs1.4 trillion from the commercial banks and mostly for three-month maturity.

Though the government believes that economic growth rate is much better than last year (expecting over 4pc), the borrowing trend from commercial banks as well the State Bank is not in line with the government’s belief.

The higher inflation could help the Federal Board of Revenue (FBR) to reach the revenue target but it seems the government still needs huge liquidity to meet its fiscal gap.

Bankers said that while the government was raising new liquidity it has been retiring the previous debts of commercial banks which accumulated to Rs3.32tr till end June 2013. The government borrowed Rs960bn alone in FY13.

The government is unable to pay back the debts it has accumulated during the last many years as the amount is too big, even higher than annual revenue collection of the country.

The government is under pressure of IMF to reduce the fiscal gap that was over 8pc in FY-13.