The State Bank of Pakistan on Wednesday, in its Treasury Bills auction, accepted bids worth Rs 81.033 billion against the target of Rs 20 billion. The SBP did not hesitate to pick above the target amount since Rs 127 billion will be maturing on July 7.
This would also give space to the market and the SBP to reduce the next auction's target amount. Another comforting factor for the central bank was that by draining excess amount it could maintain its previous cut-off yield.
In 3-month it raised Rs 2.525 billion at a cut-off yield 7.51 percent; in 6-month it succeeded in raising Rs 38.107 billion at a cut-off yield of 7.9869 percent; and in 12-month the realised amount was Rs 40.4 billion at a cut-off yield of 8.4477 percent. The head of Treasury of a Pakistani bank was of view that since for the last two weeks the central bank had been managing the market quite effectively, showing consistency in its policy, meeting the target, it successfully achieved the goal. He hoped that continuation of the policy would certainly bring more stability.
A treasury manager of a foreign bank said: "Accepting more than the target amount would help in arresting interest rate volatility. But from here onwards the SBP has to monitor the market carefully before injecting liquidity. June-end is always tricky. Tax settlement takes place by the end of the month and is noted that frequently SBP comes up with half-yearly swap on the last couple of days. So, it would be wise either to wait for a day to know the real liquidity position of the market, which will be known by discounting amount on Thursday, or allow one-day discounting and go for 8 days' Open Market Operation on Friday. Two-week swap can distort all the hard work, as excess liquidity would force SBP to drain funds."
Head of money market desk of a Pakistani bank says: "Lifting more than the target amount clearly indicates that the central bank wants tighter monetary policy. To stick to the target amount the SBP would have to lower its yield. It was the yield, which the central bank was more concerned about; which means it wants continuation of tighter monetary policy."
Majority of money market dealers were of the view that while injecting funds into the market the SBP has to reciprocate in the same manner, as it was demanding from the market, while draining funds. It should adopt same strategy.
Meanwhile, market estimates that on Thursday, after the settlement, the market would be short by Rs 20 billion to Rs 25 billion. Kibor rate may see upward adjustment of 10-20 basis points in tenor.
Interest in PIBs was not seen for last couple of days. But when money market dealers were contacted, they said that the bid of 10-year paper at 9 percent yield had disappeared. Corporates are not keen at current levels.
In the foreign exchange market, the Rupee, after hitting high of Rs 59.77 per dollar, which was last seen on November 8, 2004, gained a couple of paisa to close at 59.75.
Six-month Forward premium, which fell from the highs of 183 last seen on May 16, found support at 110 paisa in the absence of SBP. Forward premiums fell on constant Buy/Sell swap by the State Bank of Pakistan to build its reserves. There is distortion of interest rate differential caused by regular B/S swap.
With 6-month T/bills yield at 7.98 percent swap premiums should be 130 paisa and with 6-month average KIBOR at 8.42 percent forward premium should trade around 140 paisa. Foreign exchange dealers say that banks have to suffer at the hands of central bank when they are in the market for Buy/Sell swap, as there the amounts are huge which shakes the market. Bank's swap positions are badly hit when SBP is in the market and their P & L gets badly affected for reasons beyond their control.
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