KARACHI: The most attractive long-term domestic papers — Pakistan Investment Bonds (PIBs) — witnessed another significant cut up to 65 basis points in the auction held on Thursday.

The auction was held for fixed rate PIBs. The government, which has been raising maximum liquidity from banks, slashed cut-off yields on all PIBs for all tenors.

The details issued by the State Bank of Pakistan (SBP) showed that the highest cut was for the five-year PIBs as the rate fell to 9.2 per cent from 9.85pc in the previous auction — a cut of 65bps. The government raised Rs68.8 billion for this tenor.

The shortest tenor for the fixed rate PIBs was three-years, with the cut-off yield slashed by 57 bps to 8.7pc. The government raised Rs75.5bn for this period.

The benchmark 10-year PIBs also witnessed a cut of 41bps as the rate fell to 9.84pc from 10.25pc in the previous auction; only Rs15.25bn was raised for this tenor.

The long-term 15 and 20-year PIBs also witnessed a rate cut by 8bps and 5bps, respectively. The government raised Rs15bn and Rs10bn, respectively, for the two tenors.

For the last two auctions the returns on PIBs have been reduced indicating the government’s intentions to keep the interest rate unchanged for another couple of months. This is the first auction held after the induction of new Finance Minister Shaukat Tarin who has expressed concerns over some conditions accepted for loans from IMF and is willing to increase revenue without increasing taxes.

However, most analysts are sure that the Monetary Policy, due in May, would see a change in the interest rate, which they feel is likely to increase. Their research reports indicated the increasing inflation has been putting pressure on the SBP to raise interest.

Bankers, who are willing to see higher interest rate despite earning huge profits by investing in the government papers, said the IMF also supports increase in interest rate to curtail rising inflation.

The Consumer Price Index (CPI) was 11.1pc in April FY21, reflecting the increasing pressure of inflation in the economy. The CPI during July-April was 8.6pc.

Some independent economists believe that inflation was created by the government as prices of petroleum products, electricity, gas and others were raised while it failed to check the rising prices of sugar, wheat, rice, meat, chicken, fruits. They believe inflation is not demand push, instead it is cost push. In the wake of rising inflation, if liquidity supply is reduced for the economy, it will badly hurt economic growth. Low interest rate may increase liquidity supply to the economy.

However, lower interests on PIBs could hurt the interest of foreign investors who have so far invested $245 million. The returns on PIBs for foreign investors are still high in the wake of low interest rate scenario among the developed economies.

NSS rates cut

The government has reduced the returns on National Savings Schemes (NSS) from May 7, 2021.

The Defence Savings Certificates rates for 10-year were kept unchanged at 9.68pc. Regular Income Certificate rates were curtailed by 12 basis points to 9.24pc. Special Savings Certificates noted a decline of 12bps as the new rate was fixed at 8.75pc.

The rate for Behbood scheme was kept unchanged at 11.52pc.

Published in Dawn, May 7th, 2021