KARACHI, May 2: The State Bank has once again signalled to the market that it would not let the interest rates destabilize. This time the central bank has sent the signal by sucking in Rs32.9 billion from the inter-bank market through sale of treasury bills against the target of Rs22 billion — and by keeping the cut-offs almost unchanged.

The State Bank on Thursday sold Rs34.2 billion treasury bills of different maturities — and drained out Rs32.9 billion from the system. The auction of the bills had generated Rs44 billion bids whereas the State Bank had set the sale target at Rs22 billion.

Bankers said the huge response to the T-bills auction enabled the SBP to suck in the bulk of excess liquidity without letting the maximum yields fall. The SBP kept the cut-offs on six-month and one-year T-bills almost unchanged at 6.43 per cent and 6.99 per cent. At the last auction held on April 17 the cut-off on six- month and one-year T-bills stood at 6.45 per cent and 7 per cent respectively.

The central bank siphoned off Rs22 billion from the system by selling Rs22.8 billion worth of six-month T-bills. It squeezed out Rs7.6 billion through sale of one-year T-bills worth Rs8.1 billion. The SBP mopped up another Rs3.2 billion through sale of Rs3.3 billion worth of three-month bills at a maximum yield of 5.81 per cent.

“By keeping the six-month and one-year cut-offs unchanged the central bank has reinforced its earlier signals of maintaining interest rate stability,” said treasurer of a major foreign bank.

“Had the SBP stuck to the pre-auction target of Rs22 billion it would have to lower the cut-offs.”

Bankers say what made it possible for the banks to place Rs44 billion bids for the T-bills auction on Thursday was an inflow of Rs22 billion. This huge inflow through maturity of previously sold T-bills raised excess liquidity level to new heights as the market had already been surplus by Rs8-10 billion. “Besides some of the Rs44 billion bids were speculative,” said treasurer of a local bank meaning that some banks came up with huge bids without having that much liquidity to buy the government security paper.

“That is why the SBP accepted bids worth Rs34.2 billion and rejected the rest,” said a source close to the State Bank.

Bankers said after the draining out of Rs32.9 billion from the system overnight call rates soared to 7 per cent at the end of the day. For more than a week the overnight call rate remained pegged at 1-3 per cent.

Thursday auction of T-bills was very crucial because the inter -bank market had been excessively liquid for more than a week but the SBP had not conducted an open market operation to mop up part of the excess liquidity.

All eyes were set on the auction as the banks wanted to see whether the central bank lowers the cut-offs thereby negating its earlier signals or interest rate stability or it keeps them unchanged to reinforce the previous indications.

“What has transpired is that the SBP still wants the interest rate stability at all costs,” said senior executive of a local bank.

Bankers admit that the stable interest rate policy that the SBP has been pursuing since mid-February has made it easier to revise their lending rates structure.

Central bankers say the SBP has been pursuing stable interest rate policy to push the banks to fuel private sector investment and business activities by reducing their lending rates.

All the banks combined cut their weighted lending rates by 1.44 per cent to 11.97 per cent in January-March 2002.

Central bankers say interest rate stability is a must at the moment for the revival of the economy that grew 2.7 per cent in the last fiscal against the target of 3.7 per cent. In the current fiscal also the economy is projected to grow by only 3.3 per cent.