In six months, the accepted amount was Rs 6.3 billion at a yield of 8.8142 percent, and in 12-month, the face value amount was Rs 57.523 billion at a last cut-off yield of 9.0046 percent. Softer inflation number and favourable yield differential between three months and 12 months, keen interest was seen in T/bills of longest duration due to better return.
It was observed that majority of the market participants were not very keen to invest in three-month paper, due to year-end approaching. The head of a money market desk said: "Why should I invest my money in three months T/bills at 8.64 percent yield when the SBP is regularly draining excess liquidity through its open market operation. At present, overnight lending averages around 9 percent, one-week, two-week, and one-month and over the calendar year repo range between 8.75 percent and 9 percent."
On customer deposit of over Rs 100 million, banks are currently paying 11 percent to 12.5 percent. Money market traders were saying that current trend suggests that weak banks, with lower rating, may end up paying up to 14 percent to 15 percent on deposits rush to window-dress their balance sheet for year-end closing. Money market dealers were anxiously waiting for the central bank's quarterly report, to provide guidance on interest rate direction.
A Country head, interbank and corporate treasury of a local bank says, "I am keenly waiting for the central bank's quarterly report before deciding my next move. Tighter condition is likely to prevail during the remaining period of the fiscal year. If you compare total deposit of schedule banks of December 2005, which was Rs 2.661 trillion with January 2006 figure, which was Rs 2.588 trillion, a fall of Rs 73 billion in bank deposits clearly suggest that banks, at end-December 2005, borrowed for window-dressing.
The trend is likely to continue this year, as banks are already squeezed and left with little room due to high advance/deposit ratio. Six months Term Deposit Rate has already hit 12.5 percent mark. This time it may not be the repetition of last year's story, as NSS rates, which are linked with PIB's yield, will be revised upward, due to upward revision of PIB yields. So, the impact of allowing institutional investment in National Savings Schemes is yet to be seen making first quarter of 2007 an exciting one."
Meanwhile, the rupee lost its gloss despite Mobilink's inflow of $250 million, which was raised at 8.625 percent against floatation of seven years bond. This week, the rupee tested 24-month new low of 60.89 per one dollar, a level which was last seen on November 1, 2004.
The State Bank of Pakistan has been trying hard to manage its cash flow, as it has a daunting task ahead due to a number of sizeable deals in the pipeline. Corporates have started hedging their open positions fearing more rupee weakness in the coming days due to sizeable rising account deficit and large trade deficit number, which is largely depended on capital inflows.
Private sector has slowed down a bit. This pause may be due to the need for consolidation. However, the momentum would gain once seasonal borrowing from all corners resurges. Market players fear that open import policy could widen the gap, unless the ailing export sector makes a quick recovery.
While the rupee made a seven paisa recovery on Wednesday due to heavy injection of dollars by SBP through its forward outright sale aided with small amount of inflows received by the oil companies.
Forex dealers estimated that during the last 10days, SBP Buy/Sell swap rollover and outright sale must have been over $300 million. As per SBP's website of October 31, 2006, its forward leg of currency swap showed that it was already running a short position of $371 million. It seems that huge amount is piling up and forward commitment is indicating that swap premium would fall further if not corrected soon.
A treasurer of a foreign bank said, "The SBP decision to inject outright dollars in forward is of great help or else six months premium would have skyrocketed to 175 paisa, as $250 million Mobilink requires a seven years hedge. Rollover of this amount will be required after every six months for the next seven years.
The central bank is expected to continue with its rollover policy. There is another $350 million fertiliser project in the pipeline, which needs to be covered at the time of opening of letter of credit. Transactions of $40 million have already taken place and in the next 15 days another $150 million L/C is expected to be opened."
"If SBP remains on the sidelines and does not rollover its buy/sell (BS) swap, or stops forward dollar sales, the outright six months premium may hit 140-150 paisa, based on interest rate differential," says a market expert.
Country treasurer and head of capital markets and financial institution of a leading bank argues, "We are flabbergasted by the way forward premiums have recovered. Selling three months outright or doing B/S swap at 47 paisa by the SBP means cost of funds at 8.32 percent, whereas three months T/bills cut-off is 8.6417 percent, three months KIBOR is 10.32 percent, which means three months should actually trade in 65-70 paisa range.
Such trades are indeed misleading and make the market directionless. Based on current interest rate scenario, six months premium should trade at 130-150 paisa premium, which would also give boost to our much needed exports. SBP should let the market take its own course and allow the market to determine the real forward price and avoid excessive volatility in ready or spot rupee/dollar."