The State Bank of Pakistan in its fortnightly Treasury Bills auction received bids worth Rs 96.375 billion against its target amount of Rs 60 billion, which was 1.60 times the amount on offer. The SBP maintained its last cut-off yield by accepting Rs 79.8 billion against its target amount of Rs 60 billion.
It accepted Rs 44.1 billion in three-month paper at last cut-off yield of 8.3256 percent. In six-month, at 8.4869 percent the accepted amount was Rs 5.7 billion; and in 12-month, it accepted Rs 29.875 billion at a cut-off yield of 8.7907 percent.
During last 10 days, a huge amount of liquidity had pilled up, as the banks refrained from active participation in last month's T/bills auction due to half-yearly closing and fiscal year end. It is expected that with the T/bills maturity of Rs 51.78 billion on Thursday and OMO maturities of Rs 75 billion and with another Rs 15-20 billion held by banks, the market would be net 'long' by Rs 140 billion to Rs 150 billion.
As the new fiscal year begins in July, to determine the direction, financial sector will be keenly awaiting for the announcement of new monetary policy statement from SBP in this month. Signals emanating from National Credit Consultative Council (NCCC) suggest that credit to private sector in FY 2006-07 is estimated at Rs 390 billion, which is 18.18 percent higher than last year's target of Rs 330 billion.
According to the chief executive officer of one of the country's leading brokerage houses, there are a number of factors, which have to be taken into consideration.
It is known that 60 percent of Pakistan's exports are based on cotton and ancillary textiles. Seeing a falling trend in exports growth the textile sector is pressing the government to provide help in reducing its cost structure involving reimbursement of interest on machinery imports, reduced tariff for natural gas usage and exemption from various levies on account of labour laws. This amounts to a subsidy of Rs 47 billion. A time-bound subsidy of Rs 20 to Rs 25 billion seems a possibility. One is by reducing taxes and the other is through export refinance window by reducing export refinance rate from current 71/2 percent to 51/2 percent to 6 percent.
But this may not be as simple as it looks, because such a measure would disturb the fiscal deficit target of Rs 373 billion. Only a slash in a T/bills yield by 1/2 percent to 1 percent would help in attaining the budgeted deficit figure. So, a gradual decline in T/bills yield cannot be ruled out. But all this should happen in the first quarter of this fiscal year. The central bank is not expected to cut the discount rate since the six-month T/Bills yield is used as benchmark for export refinance rate. Furthermore, if subsidy is given to one particular sector, demand from a host of other sectors may arise.
The Head of Treasury and Capital Market of a major Pakistani bank said, "I think, the Rs 60 billion T/bills auction target and a liquidity of Rs 140 billion clearly suggest that the central bank has been focusing particular areas. It seems that SBP would maintain its tighter policy stance, but does not want to choke growth by draining funds from the market. Hence, I expect that it will leave enough liquidity to meet private sector credit demand on the one hand and on the other hand it would mop up excess money through OMO by maintaining certain level to contain inflation. I think, approximately 75 bp to 100 basis point gap will be maintained between six-month T/bills yield and OMO cut-off rate. On an average Rs 20 billion to Rs 30 billion OMO will be a regular feature in this quarter, unless the situation demands a change."
Treasury head of a foreign bank says, "It's simple arithmetic. When the corporate is comfortably borrowing between 101/2 percent to 13 percent, it makes little sense to put your entire money in one basket, and this is the reason that we don't see banks aggressively bidding for T/bills. Banks are only investing to meet their reserve requirements or maybe a few institutions that have excess liquidity are investing in T/Bills."
Meanwhile, in the interbank foreign exchange market, demand for dollar continues with a high of Rs 60.275 per dollar on corporate demand and government payments. No major change has been witnessed in short term swaps, with one-month swap premium locked in 13 to 14 paisa range and six-month premium trading between 87-89 paisa range.
Money market dealers are expecting that the SBP will conduct OMO on Thursday to drain excess liquidity from the market. Dealers are view that any exuberance by the market demanding higher return would leave the Rupee market liquid as SBP does not deviate from its target.