In its fortnightly Treasury Bills auction, the State Bank of Pakistan (SBP) on Wednesday accepted bids worth Rs 14.65 billion against offered amount of Rs 52.05 billion. In 3-month paper Rs 9.025 billion was accepted at a cut-off yield of 7.9197 percent against last cut-off yield of 7.8297 percent.
In 6 months, at a cut-off yield of 8.1388 percent, the accepted amount was Rs 2.775 billion against last cut-off of 8.095 percent; and in one-year the SBP could fetch Rs 2.85 billion against the cut-off yield of 8.7907 percent, which remained unchanged.
The cut-off yields were quite in line with the central bank's Monetary Policy Statement, which expects inflationary pressure to persist until December.
July Consumer Price Index (CPI) was higher against the inflation target of 8 percent.
The Head of Treasury of a local bank said, "The central bank did the right thing by not making big yield move, as we still have 14 more auctions this year. The government has already started importing food items to ease the prices pressure. It's the time lag factor, but the outcome should soon be known. Rise in oil prices is beyond control and may further distort the positive economic scenario. Therefore, decision in a haste would not bring the desired result."
The Head of Money Market desk of a foreign bank had other ideas. He said. "It makes little sense to raise 9 basis point in the 3-month paper for a tiny amount of Rs 1 .8 billion.
How strange is it that the SBP, with its tightening policy intact, leaves the market liquid by Rs 10 billion, as it hesitates to pay 10 bps in its Open Market Operations (OMO), but does the opposite in T/Bills auction, which is supposed to be the benchmark for the market? What I derive from this move is that the SBP is providing a signal to the market that it is willing to offer a few extra basis points in its next OMO."
Meanwhile, it is estimated that there is a small amount of liquidity left in the market due to averaging factor. The SBP is likely to call OMO on Thursday or on Friday, but the amount of participation should not exceed Rs 20 billion, if OMO is called on Thursday.
While the next auction is due on September 1, there is a large size maturity of Rs 96 billion due on that date. Therefore, the size of next auction is likely to range between Rs 110 billion and Rs 120 billion.
In the foreign exchange market dull conditions prevailed as the central bank is the largest buyer of dollars. Since it has to manage oil & debts payments, it regularly purchases dollars from the market. Due to surge in oil prices the size of SBP dollar buying has also increased.
The interbank market is suffering due SBP purchases of dollars, as it is deprived of its interbank FX share. The rupee closed at 59.67 per dollar. After the auction result, swap premiums eased by 5 paisa, fearing liquidity in the market.
A foreign exchange dealer of a private bank said, "Though we are moving towards exchange rate liberalisation, the difference between today and 5 years ago is that in the year 2000 the country's trade volume was $24 billion; foreign exchange reserves were $2 billion, with full day trading allowed.
Today, when our trade volume would surpass $35 billion mark, foreign exchange reserves stand at $12.5 billion. Second session interbank activity has been halted, fearing excessive exchange rate movement and closure of over 10 foreign banks, probably sensing little debt in the market."
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