KARACHI, Nov 25: The State Bank on Tuesday refused to let the yields on treasury bills rise sharply to avoid sending a wrong signal to the market. But in doing so it ended up selling only Rs200 million T-bills against the target of Rs5 billion. The SBP also conducted an open market operation simultaneously to pump in Rs8.3 billion into the banking system for one week.
The SBP had called an auction of three-month and one-year T- bills and had set a sale target of Rs5 billion. Bankers said the auction generated total bids worth Rs7.9 billion — Rs7.2 billion for one-year bills and Rs700 million for three-month bills. They said the central bank accepted only Rs200 million bids for one- year T-bills only and rejected the rest. The weighted average yield on the accepted bids worked out to be 1.98 per cent, up only three basis points from the October 29 level when the central bank had sold Rs28.6 billion one-year T-bills at an average yield of around 1.95 per cent.
“Apparently the SBP rejected the major chunk of bids because the banks had demanded 2-2.2 per cent yield on one-year bills,” said treasurer of a local bank. “The central bank did not want to increase the yield because that would have signalled to the banks that interest rates were going to move up,” he added.
But a source close to the SBP said the central bank rejected the major chunk of bids also because it wanted to keep the banks liquid towards the month-end ahead of four-day Eid holiday. He said that was why the SBP also conducted an open market operation — the fifth one during this Ramazan — and injected Rs8.3 billion into the banking system through one-week reverse repo of T-bills.
RECORD INJECTION: Senior bankers said the injection of Rs8.3 billion for one week — after a huge injection of Rs15.95 billion made last week — was the fifth one in a row during this Ramzan to help banks remain liquid.
The central bank had to make successive injections into the banking system during this Ramazan to help banks finance cash withdrawals by individuals and companies for pre-Eid spending.
“That in itself is a good sign because higher spending means the demand for goods are up and that points to a recovery in the economy,” said a senior central banker. But commercial bankers, particularly treasurers of local and foreign banks raise another question.
INTEREST RATE: Why it is so that the SBP has injected one-week and two-week funds into the market at a rate higher by several basis points than the yield on six-month and one-year T-bills?
The interest rat at which injections are made is not a penal rate. It is supposed to be a market-driven rate. So if the market rate for one-week and two-week funds are above two per cent why the six-month and one-year treasury bills rate are being pegged at below two per cent. This is the question the bankers ask, though in different words. “The answer is the T-bills rates do indicate the direction of the monetary policy but the rate at which we make injections do not,” replies a senior official of the State Bank.
The SBP had last cut its discount rate — the anchor of its monetary policy — by one-and-a-half percentage point to 7.5 per cent in November 2002. Since then it has left its monetary policy unchanged, though during this past one year the T-bills rates and banks lending rates have fallen several percentage points in the wake of the discount rate cut.