KARACHI: The government slashed the rate of treasury bills by up to 140 basis points on Wednesday in an auction held days before announcement of the mone­tary policy, reflecting the State Bank’s approach towards interest rates.

On the other hand, commercial banks participated in the auction with a huge amount of Rs2.188 trillion, but the government was able to raise only Rs820 billion. It was twice the target of Rs400bn nonetheless.

The financial market was expecting a cut in T-bill rates as the secondary market was showing a downward trend. At the same time, there is a consensus that the central bank would cut the interest rate by a big margin when it unveils its monetary policy on Nov 4.

A debate over cut in interest rate has dominated financial and equity markets this week while trade and industry is also expecting a big cut in the next monetary policy. The real interest rate is positive by over 10 per cent as inflation was around seven per cent last month.

Financial experts expect a big interest rate cut next week

The auction held on Wednesday indicated the next move of the central bank with rate cuts in all the three tenures of the treasury bills.

The State Bank reduced the rate of three-month T-bills by 140 basis points to 13.89 per cent. The bills thus sold at a rate that was 3.61pc lower than the prevailing interest rate of 17.5pc.

This constitutes a gap of over 360 basis points and raises the prospect of a big cut in the interest rate.

Financial analysts estimate a rate cut of up to 200 basis points and the cut in T-bill rates supports the estimate. The amount raised for this tenure was Rs136.2bn.

The government slashed the rate of six-month T-bills by 84 basis points to 13.50 per cent and raised an amount of Rs106bn.

The government accepted, however, the highest amount of Rs459.9bn for 12-month bonds. Banks are willing to park the maximum liquidity for 12-month papers as they see a further decline in the interest rate. The banks offered Rs1.084tr for this tenure — the highest bid in this auction. The total amount offered for purchase of the bonds was Rs2.188tr.

The government also accepted Rs121.4bn non-competitive bids, making the grand total raised in this auction to Rs819.8bn.

Unlike the previous year, the government is not selling these bonds because of higher liquidity available in the shape of Rs2.7tr supplied by the State Bank as profits in FY24.

Meanwhile, the government raised Rs529.4bn through long-term Pakistan Investment Bonds (PIBs) on Wednesday. It raised Rs436.5bn through five-year PIBs and Rs77.8bn through 10-year papers. The two-year bids were rejected.

Published in Dawn, October 31st, 2024