The State Bank of Pakistan in its 3-month and 12-month Treasury Bills auction on Wednesday raised Rs 62.346 billion, against the target amount of Rs 70 billion. The market's offered amount was Rs 105.3 billion. It is worth noting that T/bills worth Rs 89.9 billion are maturing on February 17. By accepting Rs 62.252 billion, 3-month yield was raised by 41 basis points from 4.3294 percent to 4.7441 percent, and in 12-month the SBP could get a token amount of Rs 100 million only by pushing the yield up by 50 basis points from 4.9891 percent to 5.4891 percent.
The hike in yield was very much in line with market demand. But the aggressiveness shown by the central bank during last six weeks clearly suggests that containing inflation tops the list of priorities, and if not double digit, inflation is surely close to that figure, which is still far away from the upward revised figure of more than 7 percent market.
By accepting Rs 100 million in 12-month T/bills, the central bank has tried to maintain the yield balance between the tenors rather than leaving a wide gap and for the market to guess its next move. Thus, it also stood by its statement which said that on the basis of risk it would shift from accommodative to neutral monetary policy stance to suppress the current accelerating trend.
As banks are showing interest in short tenor only, money market dealers say that refusal by SBP to accept the offered target amount of Rs 70 billion clearly shows the central bank's concern that it does not want to put all the eggs in one basket and, therefore, has probably sent a message to the market.
The other reason could be that the SBP stands by its word 'Gradually'.
Meanwhile, during the day overnight Rupee was easily available at 1/4 percent, in repo 2 weeks was dealt at 2.75 percent, 1 month was bid at 3.80 percent against offer of 4.20 percent market was bidding 3-month at 4.60 percent against 4.90 percent offer, 6-month was bid at 5.25 percent against offer of 5.75 percent.
It is estimated that on Thursday the market would open with a Rs 40 billion long position. Dealers strongly believe that with tighter SBP stance it is most likely to call Open Market Operation (OMO) on Thursday as leaving liquidity in the market makes no sense. Therefore, OMO would perfectly match next fortnightly auction, also because on March 3 there is no T/bills maturity. On February 22 there is another OMO maturity of Rs 5.5 billion.
If OMO is conducted on February 17, it is expected that the market will bid 2 weeks in a range of 4.25 percent, since in last OMO cut-off was 4.40 percent.
Money market traders must be aware that the purpose of conducting Open Market Operation is to manage market liquidity and it is not meant to give signal for the interest rate direction.