KARACHI: The government raised Rs1.65 trillion through the auction of Treasury Bills (T-bills) and Pakistan Investment Bonds (PIBs) on Tuesday, maintaining stable yields despite last week’s 200 basis points (bps) interest rate cut.

This was the first auction held following the rate reduction announced in the Dec 16 Monetary Policy. Market analysts had anticipated a decline in T-bill yields after the interest rate cut, but their stability suggests the market had already absorbed the impact.

Researchers and financial experts said the reduction in the policy rate to 13 per cent from 15pc had brought the T-bill cut-off yields closer to 12pc, a difference of only 100bps compared to the previous auction when the gap was 300bps.

“The market had already accommodated the change after a 200bps cut in the policy rate. I expect another 100bps cut in the next monetary policy, and then a pause looks like a must,” said Tahir Abbas, director of equity at Arif Habib Ltd.

The State Bank of Pakistan (SBP) has made history by slashing interest rates by a cumulative 900bps within six months. The Dec 16 decision was the fifth successive rate cut, down from 22pc since June to 13pc. This aggressive easing has been driven by a sharp and unexpected decline in Consumer Price Index (CPI) inflation.

Mr Abbas projected that CPI inflation would further decline in December, potentially reaching 4pc. He linked this trend to expectations of another 100bps rate cut in the upcoming monetary policy. “However, after this cut, a pause looks necessary since the inflation would start increasing from May,” he said.

In the last monetary policy, the State Bank referred to core inflation as a big hurdle, as it was over 9pc in November.

Breakdown of auction results

The government raised Rs826.5 billion through T-bills, including Rs366.85bn on the three-month tenor at a cut-off yield of 11.99pc, Rs200.9bn on the six-month tenor at 11.99pc, and Rs258.7bn on the 12-month tenor at 12.29pc.

In the PIB auction, Rs723bn was raised through bidding, including Rs716.5bn for 10 years and Rs6.5bn for five years. No bids were accepted for the three-year bonds.

Including non-competitive bids, the total raised through PIBs stood at Rs732.5bn, while T-bill proceeds reached Rs913bn. Combined, the government raised Rs1.645tr from the auction.

The auction results indicate a shift in government borrowing preferences, with a focus on long-term debts. Borrowing for T-bills remained below the target of Rs1.2tr and fell short of the Rs1.565tr maturing amount.

SBP data shows net debt retirement to banks, apparently made possible by the additional Rs2.7tr supply generated from State Bank profits at the close of FY24.

Published in Dawn, December 25th, 2024