During the last week ended on April 15, severe liquidity crunch was witnessed in the interbank market. The State Bank of Pakistan had sent a clear message to the market that its stance on monetary policy remained unchanged.
During the week, banks had to approach the SBP window on all four working days to manage their daily reserves position, and the discounting amount during the week was Rs 78.2 billion. On Saturday, which is the day of the week on which banks manage their weekly SLR position, the discounting amount was Rs 29.4 billion. The estimate is that on Monday the market should be short by Rs 35 billion.
Wednesday's Treasury bills bidding by banks was too ambitious, despite SBP's injection of Rs 15.1 billion in the system against the auction target of Rs 2 billion. The banks tested the central bank's nerve by offering Rs 14.65 billion at the last cut-off yield of 8.7907 percent in the six-month paper. The SBP was thus in a fix, as it was not even willing to lower the yield by 1.2 basis point to 8.7788 percent that could have been close to its auction target amount.
The market probably misread the March inflation data that was down to 6.9 percent due to lower base, as construction material, sugar and wheat prices eased off. But, based on 8-month data, average inflation still stood at 8.27 percent. Global rise of oil and energy prices, which are constantly rising, did not impact the data, as the domestic prices did not see a major change.
Treasury head of a foreign bank said: "We are wrongly accused of overbidding in the last Treasury bills auction. The central bank could have either scrapped the deal or had the option to accept Rs 2.5 billion in 12-month paper at a yield of 8.7788 percent. Who says that slashing 1.2 basis points would have sent a wrong signal to the market that the central bank has started easing the money supply.
"Given the market conditions, anyone can tell you that there are no indications of a discount rate hike in the current fiscal year. So, why would the market miss the opportunity? Look at the arbitrage opportunity provided through yield differential between 3 months and 6 months versus 12 months. The gap provides banks an excellent opportunity to make money. You cannot straighten up things with administrative measures only. It is a combination of both administrative and practical steps which produces the desired result."
A treasury manager of a local bank said: "Any number given by the Federal Bureau of Statistics or the central bank should be taken in its proper context, as the number could at times be misleading. Therefore, March CPI did not necessarily mean that all was well and inflation was now manageable. We may see lower inflation for another month or so, before a bounce-back is witnessed. The central bank will not spoil all the hard work it has done to contain inflation.
"If you look at the last two weeks' overnight rupee average rate, it was around 8.775 percent. The central bank has been giving a clear signal by keeping the market tight, cut-off is stable, it is consistent in its open market operation by moping up the liquidity. Then why does the market fail to read the direction? Since quite a while the market has been trading between 7.75 percent and 9 percent band, the SBP did not allow the overnight rates to fall."
Meanwhile, the dollar/rupee parity continues to trade in an extended band, providing opportunity to both exporters and importers to either offload their holdings or hedge their transactions. Foreign exchange dealers and the business community have been demanding a wider band. Rupee/dollar, which was stuck in 5 paisa to 10 paisa band, is now trading in 59.90 to 60.25 range. On Saturday, the dollar closed at Rs 59.95.
The chief dealer of a Pakistani bank said: "In the recent past we had witnessed a very narrow trading band. Wider band is healthy for the market. It is the demand and supply factor, which moves the market and determines the real value of the rupee. It also shows SBP's confidence in the interbank foreign exchange market. In last two years, the country's trade volume has almost doubled to dollar 45 billion, but activity in the foreign exchange market has been witnessing a declining trend, which was not a true reflection of the market.
"But the market has to keep in mind that excessive volatility on any single day would not be acceptable to the central bank. Hence, speculation will never be encouraged.
"It is also encouraging that gates have been opened and the SBP's next move in 6 months to 12 months time could be oil payments through interbank market.
"Highly volatile currency is not preferred by any central bank, as it becomes a burden on the import bill, debt and trading activity. If we compare Pak Rupee with the region's annualised volatility factor during this fiscal year until March, the Rupee is a stable currency since it fluctuated only 2.7 percent versus Malaysian Ringgit 1.2 percent, Thai Baht 5.1 percent, Sri Lankan Rupee 3.3 percent, Indian Rupee 3.5 percent, Philippine Peso 3.5 percent, Bangladesh Takka 5.9 percent and Indonesian Rupiah 8.2 percent.
"Furthermore, Rupee stability can be judged by S&P's rating which is Local BB, with stable outlook. Foreign currency B plus, with positive outlook, whereas the Philippines and Malaysia's sovereign rating is one notch higher.
"Another good indication is that the central bank is doing away with its bad habit of forward Buy/Sell swap--another factor which destroyed the interbank market. SBP Buy/Sell swap in a constant decline. In November it was dollar 370 million; in December it fell to dollar 290 million; in January it came down to dollar 245 million; in February it was up to dollar 270 million. Hopefully, with thin presence in the market, March figure should show a dollar 50 to 60 million decline, and if the trend continues in April the market expects a fall below dollar 100 million.
"This is one of the main factors that have pushed 6-month forward swap point, which is now inching up and has so far gained 20 paisa. Currently, 6-month is trading at 102 paisa. Based on interest rate differential and with 6-month KIBOR at 9.4 percent, 130 paisa is realistic forward swap point."
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