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Finally, the market and SBP are synchronizing on the money market rates. The tussle of rates was ongoing between the government and market (mainly banks) on the government paper auctions. The signaling was not getting through. Indicators in the monetary policy statements and aggressive statements by the finance minister were not absorbed by the market reflecting itself in the divergence of market rates. Then the SBP came with an option of extended (of higher days) OMO injections, and governor’s communication of pause on policy rate in January seems to be finally calming down emotions.

In the recent PIB auction, the government accepted Rs158 billion (against the target of Rs100 bn) at the cut-off range of 11.5-11.76 percent in 3Y, 5Y and 10Y fixed PIBs. The market participation was Rs507 billion – highest participation since May21. The band of bond yields between 3Y and 10Y is shrinking- 3Y yields have moved up from 11.34 percent to 11.5 percent from the previous acceptance in Nov while the 10Y cut-off yields are down by 3 bps. This implies that the market is not expecting rates to move too much from current levels.

Unlike the case in 2019, when the government fetched around Rs1.5 trillion between Mar-Sep while the cut-of ranged between 12.25 -14.25 percent. At that time the policy rate peaked at 13.25 percent. Similarly, in 2014, around Rs2 trillion were accepted around 12 percent in PIBs when the policy rate was close to 8 percent.

Now, it seems that Deja-vu of 2019 or 2014 may not take place as the government has floating PIBs option which was absent at that time. This floating option shall keep the greed of banks in check on the PIBs issuance. Moreover, the extended tenor OMOs are taming banks and compelling them to bid at better rates for 3M and 6M papers. Now if the policy rate moves up to higher levels, the market rates shall move in tandem. Otherwise, market rates may not go crazier any further.

The story of OMOs is interesting. After the MPS on 14th Dec, where SBP gave a clear forward guidance, market disregarded SBP’s auctions and communication. And the T-bills cut-off remained high at 11.5 percent for 6M against the policy rate of 9.75 percent. Then the SBP did 63 days OMO on 17th Dec at 9.82 percent and injected Rs700 billion. That had resulted in moving down of secondary market yields. Now another 63 day OMO at 9.85 percent where SBP has injected another Rs382 billion. Now the 7Days OMO injecting is at Rs1.1 trillion and similar amount is in 63 OMOs. The market is fairly covered for interest rate risk till March. The key to see macro numbers in Jan and Feb that shall decide the action in March.

The good thing is that the numbers are coming better than what was anticipated. The key number to watch in Pakistan is not the inflation, and neither the government debt. Rather it is the current account deficit. The Nov deficit came at $1.9 billion while the hawks at banks were expecting around $3 billion. There was some goof up by the PBS in oil imports and there is some lag in actual imports and their payment. The PBS and SBP gap in imports shall iron out in months to come.

Then the inflation expectations may taper off a bit after accounting for the falling oil prices and lower pressure on the currency due to higher inflation and current account deficit expectations. All these have bearings on the money market rates. All eyes are now set on the T-Bills auction on 29th December where the target is Rs 1,200 billion.


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