The State Bank of Pakistan will announce its auction target on Monday against maturity of Rs 28.626 billion on Thursday, December 8. Market consensus for the target amount ranged from Rs 30 billion to Rs 35 billion.
According to Currency Market Associates (CMKA), Thursday's auction is unlikely to witness any major change in T-bills yield and, therefore, last cut off level is likely to be maintained. A couple of basis points on the upside is a possibility, if sizeable amount is offered.
On the downside, cautious bidding by bears believing in 'Accommodative' policy stance may bid 5 to 10 basis points lower versus last T-bills auction cut-off. It was of the view that the central bank would adhere to its 'Neutral' monetary policy stance, as it monitors rates on daily weighted average basis.
The report further says that the medium-term inflationary pressure that has built up as a consequence of excess liquidity due to increase in circulation of money supply which shot up to Rs 35 billion, is now gradually on decline.
Circulation of money that usually comes into the banking system soon after Ramazan and Eid holidays was delayed due to earthquake. By now, it should be down to somewhere between Rs 20 and Rs 25 billion. Hence, the decline must have eased the inflationary pressure to a certain extent.
CMKA adds that the pace of exceptional growth that was seen during last couple of years has certainly slowed down, as the central bank had to make sharp and quick up moves by hiking interest rates to tame the inflation.
But if one looks at the credit growth, it is still in positive zone, not hurting the economy. Unnecessary inflation has started to ease off. Last two weekly data of Sensitive Price Index (SPI), released by Federal Bureau of Statistic, has shown signs of easing.
A treasury head of a Pakistani bank says, "In the interbank market, we are witnessing a positive shift in the central bank's approach from its carrot and stick policy seen until last fiscal year. We do not get frenetic calls from SBP dealing room demanding to know the details of tiny transactions.
In fact, the SBP has allowed the market to determine the real value of exchange rates. It is the demand and supply factor which now determines the rupee/dollar direction."
The treasurer further said: "We could see a positive change in the monetary management. Liquidity is being well managed from central bank's perspective. We are not witnessing 1 percent to 2 percent overnight market rate. Open Market Operation (OMO) is done on regular basis and is announced before fixation of KIBOR, unlike in the past, which gives the market enough space to decide its day-to-day lending and borrowing strategy.
But the central bank has to realise that the banks' treasury should not be pushed to the wall by keeping its daily benchmark rate close to T-bills yield and instead should allow 2 to 3 percent volatility in the interbank money market.
Treasury is a specialised field. Hence, its assignment should not be restricted to monitor commercial transaction only or it will start hindering the development of the market."
The recent statement by the former Governor of SBP that inflation was a top priority might see tug of war between the bulls and the bears in Thursday's T-bills auction. It is expected that the bulls would be bidding aggressively, while bears may bid at lower than the last cut-off rates, which also means wide bidding ranges.
It is expected that majority of banks would be bidding in 12-month paper due to attractive return on yield. SBP has to consider sending a signal to the market that it is keener to sell short-term papers, because after January till May, next year, the maturity amount of T-bills is Rs 32 billion.
Even if it slashes 12-month yield by 2 to 5 basis points, the market might get the signal of central bank's intention, or SBP may become hostage to further rate hike demand.
Money market dealers estimate that currently the rupee market is short by Rs 5 billion to Rs 8 billion and since there is a total inflow of T-bills plus OMO Rs 57 billion on Thursday, the market is likely to utilise its 4 percent average facility, which means that available funds for auction would be between Rs 35 and Rs 40 billion.
On Saturday, last overnight rupee lending of half-billion was done at 8.90 percent.
Meanwhile, in the interbank foreign exchange market the rupee remained under pressure, closing at 58.84 for a dollar, as according to unconfirmed sources last week there was $110 million govt debt payment with 2 lots of $65 million and $55 million oil payments.
On Monday, the rupee may come under renewed pressure and lose a couple of paisa as Parco and corporate payments of $20-25 million may see dollar buying interest. But the rupee is expected to gain sharply later in the week and may trade in a 59.75-59.80 band.
Market sources have also confirmed that the SBP had done a sell/buy Re/dlr swap up to 1-month. Normally, the central bank is blamed for one-sided Buy/Sell swap transaction SBP could have acted, due to sharp fall in forward premiums.
Six-month forward premium fell to 82 paisa, while interest rate differential suggests 6-month forward premium should be somewhere between 120 paisa and 140 paisa.
Fall in forward premiums also hurt the exporters. Forex dealer of a foreign bank said that if the central bank was seen checking a Sell/Buy price, forward premiums would make a sharp spike.
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