Banks' endeavour to raise interest rates steeply and take advantage of end-June financial close of monetary aggregates of the State Bank of Pakistan, appears to be faltering.
The central bank on the other side appears to be firm in its stance on a gradual upward movement and is expected to reject a sudden jerk in either lending rates, according to knowledgeable sources.
Bankers claim the excess liquidity in the market is now over Rs 70 billion. It would shoot up Rs 148 billion by July 8, 2004 and touch Rs 249 billion by August 14th, 2004.
They feel that SBP cannot leave so much liquidity in the system as it would exert pressure on the rupee and weaken it against the dollar and it also would have inflationary consequences.
They feel SBP is vulnerable at this point as it only holds Rs 361 billion in Treasury Bills to drain Rs 249 billion from the system.
Further, it is felt that SBP has to adhere to the target of Net Domestic Assets (NDA) agreed with the International Monetary Fund for end June, 2004 and therefore has to offload some of its T-Bill holdings by the end of the fiscal year.
Bankers also feel strongly that the low interest rate scenario is over. And, the government will now be forced to borrow from the banking system for budgetary support as inflows from non-bank sources (NSS scheme plus forex) dwindle.
While SBP is in agreement with commercial bankers that the rates have indeed bottomed out, it does not want the rates to rise steeply in the short run as it could choke off growth.
However, the SBP is willing to raise rates in the long-term ie for three years and above tenors more steeply to try and flatten out the yield curve on government paper. The gap between a year T-Bill and 10-year PIB has grown bigger.
At present, three major banks are overflowing with liquidity - National, Habib and MCB. There has been some discussion to do a short term Repo with them, of one month and two months, to drain the liquidity from the system. But the big boys felt that doing REPO with SBP is a raw deal for them.
Therefore, the consensus is on doing of a normal open market operation (OMO) auction on Monday June 28, 2004.
If the scrapping of last two Treasury Bill auctions is taken as a guide, SBP appears to be signalling to the banks that it would accommodate a 20 to 40 basis point upward movement on the last cut-off.
Anything above that is unacceptable. At the same time SBP is willing to be more flexible and would accept offers of 50 to 75 basis point upward movement in case of Pakistan Investment Bonds (PIBs).
Sources in the central bank were categorical that banks who felt that SBP had some compulsion to meet the end June NDA target were totally wrong. "We are on target and in case of any slippage we have that flexibility from the Fund," sources said.
Further, it was stated that SBP did not wish to punish or hurt the banks but at the same time was not willing to allow rates to jump in spurts which have no co-relation with economic realities or be cornered.
"We will not allow the gap between lending rates and deposit cost to increase. These must be in line with international norms," it was emphasised.
In order to reverse the present trend of higher outflow than the inflow in the NSS instruments, sources said, the government is likely to adjust the rates upward for individual depositors.
The corporates, however, will remain debarred from purchasing NSS paper and would have to shift their investment into PIB's.
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