The State Bank of Pakistan will announce its last Treasury Bills auction target for the year 2005 on Monday, December 19, against maturity of Rs 41.24 billion for Thursday, December 22. Market consensus for the target amount ranged from Rs 50 billion to Rs 60 billion.
According to Currency Market Associates (CMKA), Wednesday''s T/bills auction trend would remain unchanged seen since mid-September. Aggressive bidding would make little sense, as the central bank is unlikely to shift its policy stance. Whereas, in the absence of PIB auction and better return offered in 12-month paper, the market would be keen to bid in 12 months.
In this auction, serious bidding could start 10 basis points lower from last cut-off yield, ranging between 8.68 percent and 8.78 percent. In 3-month and 6-month, the SBP may once again scrap the auction if the market is too demanding.
CMKA further says that recent borrowing through Repo transaction by SBP clearly suggests that the central bank is trying to shape up the yield curve from ''flat'' to ''normal'' yield curve.
This means that the papers with short-term maturities have lower yield to offer if compared with long-term bonds, which have higher yield.
If the central bank is shaping up the yield curve, it has to do it carefully. So far, it has been mopping up excess liquidity successfully through Repo transaction. It has to watch money supply closely. Money in circulation is up and is likely to rise due to withdrawal of money from banks for sacrificial animals.
It would be too early for the SBP to ease its stance for two reasons: First, the CPI data is still teasing 8.5 percent mark, that is above the target; and second, most importantly, the Wholesale Price Index (WPI) data, which is the future inflation trend indicators, is currently 11 percent, not showing sign of comfort in the first quarter of next calendar year.
The report further adds that another factor that could have forced the central bank to ease off its short-term rates could be distortion in bank''s deposit rates.
To meet its target and for window-dressing purpose, some of the banks and bank branches with weak footings were offering return of 13 percent or above on deposit over the year. The move could be to arrest this distortion.
Market consensus on auction target ranges between Rs 50 billion and Rs 60 billion, based on the size of inflow of T/bills plus OMO maturity, which is about Rs 75 billion, out of which outflow Rs 15 to Rs 20 billion will be due to year-end settlement and oil payments.
On Saturday, another notable change was observed that, for the first time, the SBP gave a range of bids from 7.45 percent to 7.75 percent, accepting Rs 5.15 billion against the offer of Rs 6.2 billion at 7.65 percent cut-off. This was quite encouraging, as this data would help in determining the liquidity position as well as the trend.
Meanwhile, in the interbank foreign exchange market, despite record demand for dollars during the week, the market did not panic and behaved quite orderly.
Asad Rizvi of CMKA says, "The central bank did a commendable job by managing such a huge outflow of foreign exchange from the country, but exchange rate made a 7 paisa down move in 5 days to top out at Rs 59.90 to a dollar. Approximately $800 million were remitted during the week.
There was Eurobond final settlement; so Principal plus interest amount was $165 million. Haj money paid to banks abroad was $50-60 million, ADB and debt payment of $40 million and oil payment of $135 million. Corporate payment during the week was of approximately $400 million.
Though central bank paid $400 million from its kitty, but from where did it purchase these dollars? It purchased dollars from the interbank market. This also confirms that there was good inflow of money from export proceeds and overseas remittances."
He adds, "I can tell you one thing for sure, that unlike past, when the SBP would call banks to know the nature and time of transaction, and snub the banks for accepting commercial transactions, banks do not get call from the central bank any more. Neither banks fear from its past experience that buying dollars risks immediate call from SBP. Suddenly the world has changed for the interbank forex market and dealing rooms feel quite comfortable. Though Forex reserves are gradually declining due to higher oil prices and rising import, the market is well aware of the real factor of decline. The central bank must be making best efforts to manage it."
He further says, "All that glitter is not gold. The central bank has a tough job ahead. The widening of the trade gap is a matter of great concern. If imports are not checked, and global oil prices on an average stay above $56 a barrel, deficit is likely to hit $11 billion mark. For how long are we going to rely on Privatisation money? I think, the pressure on exchange rate will mount in the next quarter."
He said: "While the pressure on rupee against dollar in the interbank foreign exchange market is likely to ease off next week and rupee might re-test Rs 59.75-Rs 59.80 zones, as major payments have been settled. Bigger inflow is expected as we approach Eid-ul-Azha.
"Pressure on forward swap points will also ease next week and swap points may recover, as SBP was doing large Buy/Sell swap to generate dollar, which helped payment, and to hold foreign exchange reserves, resulting slide in 6-month swap points to 13-month low of 78 paisa. SBP may also surprise the market with a Sell/Buy swap, as it does not want to be predictable."
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