KARACHI: The government slashed the cutoff yi­­elds on treasury bills by up to 148 basis points on Wed­nesday, reflecting the rec­ent cut in the interest rate.

The State Bank had an­­nounced a 100 basis point cut in the interest rate to 19.5 per cent earlier this month. The decision was taken after inflation fell to 11.1 per cent last month.

Market experts said it was expected that cutoff yields on t-bills would come down further as it remains close to the policy rate.

The SBP reported that the highest decline of 148 basis points was recorded in three-month t-bills. The yield fell to 17.49 per cent from 18.97 per cent in the previous auction. The government raised Rs52 billion from the latest auction.

The benchmark six-mon­­th t-bills saw a decline of 101 basis points to 17.74 per cent from 18.75 per cent in the previous auction. The government raised Rs144bn against bids of Rs403.2bn.

For the 12-month papers, the rate was slashed by 75 basis points to 16.99 per cent from 17.74 per cent. The amount raised for this bill was Rs125bn against the highest bid of Rs524.3bn.

According to bankers, investors were willing to park maximum liquidity for long-term papers in anticipation of further cuts in the interest rate.

The government raised a total amount of Rs396.8bn on Wednesday against total bids of Rs1206.3bn. The bids included non-competitive ones too.

The amount borrowed by the government was much higher than the target of Rs150bn and maturity of Rs184bn.

Cost of borrowing

The declining rates of do­­mestic bonds would re­­d­uce the cost of borrowing for the government, which has to pay back the largest am­­ount from the budget. This huge outflow of liquidity for debt servicing has created immense pressure on the economy as the government finds itself trapped.

It has to borrow more for debt servicing every year and the amount is rising consistently.

The financial market expects a further cut in interest rate, which would certainly reduce the retu­rns on government papers.

Borrowing by the private sector touched the lowest level in FY24 as higher returns on government papers have virtually squeezed borrowing by the private sector as it touched the lowest level in FY24.

The private sector says is virtually impossible to conduct business with a prohibitive interest rate of 22 per cent. The worst consequence of non-availability of bank money for the private sector was a contraction of growth rate in both FY23 and FY24.

Published in Dawn, August 22nd, 2024