KARACHI, Jan 3: The State Bank, after mopping up Rs6.5 billion from the inter bank market for one week on Monday, plans to sell Rs10 billion six-month treasury bills on Wednesday.

Bankers anticipate a modest increase in the six-month T-bills yield. They say since the auction of the bills is not going to offset any inflow of money into the market, it seems that the central bank is auctioning the bills just to set the new yield.

They say that in all probability the SBP will increase the yield modestly just to reinforce its earlier signals that it would continue to tighten interest rates to combat inflation.

Last month, the central bank had scrapped an auction of six-month T-bills to avoid a sharp increase in the yield. But this time the central bank seems set to sell these bills to set a new benchmark yield though it is unlikely to raise the yield by a wide margin.

The SBP is likely to keep the weighted average yield closer to 4 per cent, up from the previous level of 3.74 per cent. If that happens, the export refinance rate for February would also rise to 4 per cent from 3.5 per cent for January because the average yield of six-month bills determines this rate.

And, the increase in export refinance rate from 3.5 to 4 per cent means that banks would charge a maximum mark-up of 5.5 per cent on export loans in February. During this month they cannot charge more than 5 per cent mark-up on such loans as they are allowed to keep a spread of 1.5 percentage points over the State Bank's export refinance rate.

The reason the SBP may increase the average yield on six-month bills to around 4 per cent is that it can no longer afford to scrap auctions of bills, which it did for several times between July-November 2004 to avoid increasing the yield sharply.

Inflation in July-November 2004 rose by 9.1 per cent year-on-year. And, according to the latest estimates of the SBP it may end up somewhere between 7.6-8.2 per cent during this fiscal year, against the initial target of 5 per cent. If the central bank does not step up the tightening of interest rates keeping inflation even within this range would be difficult.

The increase made in petroleum prices, first in the middle of last month and the then at the eve of this month is sure to further fuel inflation. So, in all likelihood the central bank would speed up the process of tightening of interest rates. This seems all the more likely because it has dropped a hint to this effect in its first quarterly report released here last week.

OMO: On Monday the SBP mopped up Rs6.5 billion through repo sale of treasury bills for one week at 2.4 per cent to keep the market less liquid ahead of T-bills auction. Bankers said that the market was surplus by Rs10-12 billion despite the outflow of Rs6.5 billion through OMO.