Realising that liquidity in the inter-bank market was tight, the State Bank of Pakistan (SBP) has decided not to raise Rs 2 billion in the six-month T-bills auction, however, the central bank did give a signal to the banks to raise lending rates at a measured pace by hiking the yield by 0.3919 basis points on Wednesday. Sources said the SBP has reconciled to the fact that inflation in 2004-05 will be higher than the target of 5 percent, however, there is a need to keep it in check, possibly below 7 percent.
Discounting for supply side seasonal shortages and the Ramazan price hike, the SBP is likely to take a more aggressive stand in the early part of 2005, after inflation for the month of December 2004 has been estimated.
The SBP accepted Rs 1.1 billion and to do so, it had to increase yield by 0.3919 basis points. Yield in six-month jumped from its previous cut-off of 2.6415 percent to 3.0334 percent. Market offered amount was Rs 5.7 billion.
By accepting small amount and raising the yield sharply, the SBP has once again provided clear signal to the market that they are committed and prepared to take every measure to cool inflation.
Most recent indicators released this week by the Federal Bureau of Statistics showed no relief in the inflationary pressure. The CPI stayed above 9 percent. The SPI for August was 14.38 percent.
Inflation is subdued in the developed world but it is not so in developing economies and Pakistan's economic condition require appropriate measures to keep it under control.
Six-month treasury bills rate is the benchmark lending rate for banks and leasing companies. This also means export refinance rate will soon be adjusted.
A treasury head of a Pakistani bank says, "Our interest rates went too far and low, we still fail to understand that what caused the steep fall of our interest rates, T-bills rates were pushed below 2 percent. Probably, banks overreacted due to excessive money supply and were late in deploying their funds to the corporate sector.
Instead, we all panicked and aggressively went into bidding T-bills and PIBs, without realising that the SBP discount rate remained unchanged at 7.5 percent. Therefore, realistically 5 percent to 5.5 percent should have been the ideal 12-month T-bills yield with the current pace of inflation."
Treasury manager of a European bank says, "We have the habit of comparing ourselves with India and try to follow them, which is wrong. Recently Pak rupee weakened against the dollar and the reason given was that since Indian rupee had shed its weight against the dollar, so to keep our exports competitive with India, we too have to devalue our currency.
In the last 10 days against Indian rupee, dollar had shed 60 paisa or 1.30 percent. While Pak rupee continues to take the beating against the dollar and is getting close to test the crucial 59 levels. The secret of Indian rupee's current strength is nothing else then to check inflation. While India's 6-month and 12-month T-bills yield is 4.90 percent and 5.13 percent, respectively."
Money market dealer of a local bank said, "I think the current pace of rate hike is quite satisfactory. Big moves can hurt our books." Meanwhile, money market condition remained very tight. Rupee lenders had another profitable session, overnight borrowers had to pay 7.40 percent to meet their reserve requirement. To borrow one-week rupee, lenders were offered 5.75 percent, two-week was borrowed at 4.25 percent, and one-month was offered at 3.5 percent, three-month inched up to 3.10 percent, six-month was available at 3.25 percent and 12-month can fetch 3.75 percent.
The money market will remain tight on Thursday, but dealers say that on Friday banks may have to approach the SBP discount window to borrow funds unless the central bank invites for Open Market Operation (OMO).
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