KARACHI, Dec 13: The ‘unexpected decline’ in inflation below 8 per cent has wiped out banks’ hopes to get higher return on T-bills. Despite outflow of Rs4.2 billion from the money market, the rates slipped further on Tuesday indicating the presence of substantial liquidity. The SBP carried out another open market operation (OMO), the fifth since December 7, and mopped up Rs4.2 billion at a much lower rate of 7.65pc.
The overnight rate, which was 6 per cent at the closing of Monday market, fell to 4 per cent on Tuesday. Banks offered Rs5.9 billion showing the holding of liquidity. Analysts said that the banks had kept liquidity to meet their last days’ requirement before closing of the year on December 31.
At the end of each closing year, banks require to show healthy deposits in their balance sheet and protect themselves from emergency outflows.
“They also need liquidity to remain at safe side as banks might have to face liquidity shortage due to payment of taxes and dividends of companies through banks,” said an analyst. A number of companies pay their taxes and dividends at the end of the calendar year, which may be in billions of rupees.
The State Bank of Pakistan (SBP) has accumulated T-bills and OMOs worth Rs71 billion to be mature next week when T-bills auction will be held. The SBP might pick up the whole lot, if banks offered them the same quantity of money.
“The current inflation rate, which dropped to below 8 per cent, may result in softening of hard stance of tight monetary policy and the short-term liquidity management might leave the market with some liquidity in the next auction,” said the analyst.
It is widely believed in the corporate sector that the SBP will not change its tight monetary policy, despite being reviewed by the end of the first half of the current fiscal 2005-06.
However, they maintained that the latest inflation, which slips below 8pc — 11 months low — has eliminated even a remote possibility to increase the return on T-bills. The banks have shown their reluctance to rent their money at the prevailing T-bills rates demanding returns ranging from 8.1 to 8.29pc for 3-month and 8.29 to 8.55pc on 6-month T-bills in the previous auction. The SBP refused to accept their demand and rejected all bids for 3 and 6 months.
