KARACHI, Feb 11: The State Bank on Monday cut the coupon rates on long-term Pakistan Investment Bonds by 1-1.5 per cent in a follow-up of one per cent reduction in its discount rate announced on January 22.

A brief SBP announcement said the coupon rates for three-year and five-year PIBs have been reduced from 10.5 and 11 per cent to 9 and 10 per cent respectively. It said the rate for 10-year PIBs has also been cut down from 12 to 11 per cent. The new rates will apply in next auction of the bonds. SBP gave no date for the next auction.

But bankers say according to the present practice of alternate auctions the State Bank would auction 10-year bonds this month.

On January 26 the central bank had auctioned three-year and five-year bonds but it had made no change in their coupon rate in view of the January 22 discount rate-cut.

In November the SBP had slashed coupon rates of three-year and five-year bonds from 11.80 to 10.5 per cent and from 12.20 to 11 per cent in the wake of two per cent cut in discount rate announced on October 20. The central bank had also lowered the coupon rate of 10-year bonds from 13 to 12 per cent in December last also in a follow-up of the discount rate reduction.

Senior bankers say the cut in PIB coupon rates would help the government raise cheaper credit mostly from non-bank sources at a time when it is struggling hard to keep its borrowing from banks within limits.

INJECTION: Meanwhile, the SBP is going to inject liquidity into cash-strapped inter-bank money market on Tuesday ahead of Eid-ul- Azha. The injection would make the market liquid enough to enable the government to sell 10-year PIBs later on this month.

Bankers say the market that has been dry since Wednesday last will see a further fall in liquidity due to pre-Eid withdrawals. But the central bank is prepared to pump in sufficient money to keep the market as much liquid as is desirable. “We will hold an open market operation tomorrow to inject money into the system,” said a central banker. He said the SBP would inject money for two weeks and four weeks.

The inter-bank market lost much of its liquidity on Wednesday when the central bank accepted Rs24.7 billion worth of bids for treasury bills at a regular auction against the target of Rs4 billion. Central bankers say they did it to teach those bankers a lesson who tried to take the auction for a ride by submitting large bids without having matching liquidity. The very next day the market discounted by Rs21.2 billion and then there was no end to it.

Both banks and other financial institutions went on borrowing overnight funds from the SBP discount window day after day: On Monday the inter-bank market discounted by about Rs17.4 billion.

Bankers say the market will see further fall in liquidity levels when people start withdrawing money from banks to buy sacrificial animals ahead of Eid-ul-Azha due to fall on February 22 or 23.

Both individuals as well as corporates and government-owned organizations take out Rs10-15 billion from their bank accounts ahead of Eid-ul-Azha. The major chunk of the money flows back to the system — but not before four to six weeks.

So there is nothing new in banks confronting such a liquidity crunch. “But what makes it more difficult this year is that the market was stripped of cash much earlier,” said treasurer of a local bank referring to Wednesday’s auction.

It is difficult to say how much liquidity the SBP will inject on Tuesday because that depends not only on the market needs but also on the cut-off yield on treasury bills.