The State Bank of Pakistan has invited tenders for sale of 3-month and 12-month Government of Pakistan Market Treasury Bills worth Rs 60 billion, with settlement date on Thursday, July 8.
The central bank has already rejected two previous treasury bills auctions, whereas money market dealers are persistently demanding for substantial rate hike.
Presently, the market is long by Rs 10 billion, and another Rs 22 billion OMO maturity is due on Wednesday, July 7, and on the following day there is large size T/Bill maturity of Rs 78 billion. which is likely to swell the market liquidity position to around Rs 110 billion.
Money supply is showing constant growth. Recent quarterly report FY04 figures indicate that currency in circulation has risen by 18.8 percent to Rs 587 billion. Deposits have jumped by 15.1 percent to Rs 1,819 billion. While CPI number in not showing any sign of easing for last two quarter, the risk of rise in inflation would remain high if the liquidity is not drained out from the system.
Following July 8 maturity, Treasury bills holding by banks would drop to around Rs 280 billion, and the next T/bills maturing on August 5 is of extremely large size, worth Rs 101 billion, and prior to that another Rs 40 billion one-month OMO maturity is due on July 26.
As third quarterly report FY04 from June 30/2003 to May 29/2004 indicates that the Demand and Time Liability (DTL) has risen to Rs 1.819 trillion, it is assumed that banking is required to maintain 15 percent Statuary Liquidity Requirement (SLR), which can be in the shape of Treasury Bills, PIBs or cash amounting to approximately Rs 275 billion, which suggest that the market would continue to witness the ''cat and mouse'' game for some time till it reaches a point of compromise.
A treasury manager of a foreign bank says, "The impression given to us is that all is well and therefore there is no essential borrowing required at the moment. If this is true then why did the central bank pay 4 percent before the half-yearly closing to borrow Rs 22 billion? Looking at the maturity profile of this quarter, it is quite messy.
The picture is not as rosy as is being projected. The SBP cannot afford to keep the market liquid for a long period of time. The inflation is already getting out of hands and I am expecting inflation to further creep up and knock 5 percent figure during this fiscal year. We will certainly see revision of inflation numbers."
The executive of a Pakistani commercial bank said. "I think, there are two factors which should be taken into consideration seriously; firstly, the banks cannot afford to sit ideal on their liquidity; and secondly, the SBP may be willing to raise T/Bills yield by 25 to 35 basis points to discipline the market, but may not agree to raise by a full percentage point in one go. Hence, 3-month yield ranging between 1.90 and 2.10 percent, and 12-month yield ranging between 2.60 and 2. 80 percent may be acceptable to them. But acceptance at these levels would only be possible if the amount is close to the target amount, or else rejection is quite a possibility. Having said this, it is not necessary that the central bank will stick to the given target. In the past, it has surprised us by accepting large amounts."
Meanwhile, money market rate ranges are for 3-month between 1.80 percent to 2 percent, six-month between 2 percent and 2.25 percent, and one-year between 2.70 percent and 3 percent. A survey has shown that majority of the banks are likely to bid larger amounts in three-month.
Serious bidding is expected in ranges between 1.90 percent and 2.10 percent, whereas in one-year, banks are less keen to bid aggressively below 2.75 percent as they believe that the central bank will soon have to take bigger leap to hike the rate to control the money supply.
Since the SBP may not be willing to call for Open Market Operation every now and then, a number of money market players firmly believe that rejection of auction will force the SBP to continue draining funds through Repo, commonly known as OMO, to manage liquidity.