Govt raises Rs835bn without a cut in T-bills rates

KARACHI: Without changing the cut-off yields on treasury bills (T-bills), the government raised Rs835 billion, exceeding the auction target, on Wednesday.

Financial market experts said the auction result was up to expectations since the market has already incorporated the expected cut in the interest rate.

The State Bank of Pakistan (SBP) is scheduled to announce a monetary policy for the next two months on Sept 12, and analysts and researchers are sure about a significant cut in the interest rate.

Inflation eased to single digits in August. Most financial sector experts said the interest rate cut was necessary but differed on quantum.

Market has already incorporated expected decline in SBP policy rate

Experts said the steep inflation fall to 9.6 per cent created space for up to a 200 basis points (bps) cut in the SBP policy rate. However, most experts believe the interest rate may see a 150bps reduction.

The CPI-based inflation has declined each month and slowed to 11.1pc in July.

The cut-off yields on T-bills are directly tied to the interest rate, which stands at 19.5pc.

Financial experts said if the State Bank slashes the rate by 150bps, the market has already incorporated the impact of a possible cut.

The T-bills rates for three-month, six-month and 12-month were kept unchanged at 17.47pc, 17.74pc and 16.99pc.

In today’s T-bills auction, the target of Rs700bn was exceeded by 19pc. Major participation was witnessed in the 12-month tenor, with bids totalling Rs468.4bn.

“We believe the market’s anticipation of a potential rate cut in the upcoming monetary policy has led to heavy bids, especially in the longer tenor, with the SBP receiving a total of Rs1,618bn in bids, reflecting strong interest from participants,” said Tahir Abbas, head of research at Arif Habib.

He said the cut-off yield is already down by 2.5pc compared to the policy rate. The expected cut of 150bps would reduce the policy rate to 18pc, which is still higher than the prevailing T-bills rates.

He said the highest bids worth Rs875.5bn were offered for 12-month T-bills, reflecting the market’s anticipation about the interest rate cut. The investors are willing to park maximum liquidity for longer papers in the wake of possible rate cuts in the future.

Financial experts said the inflation is coming down unexpectedly faster than anticipated by the economic managers.

However, any change in the regional dynamics could escalate oil prices, create hurdles for exports, increase the cost of imports and finally increase inflation, they noted.

Published in Dawn, September 5th, 2024