SBP may raise cut-off rates as govt borrowing continues

The central bank might be forced to increase the cut-off rates to continue borrowing from the scheduled banks, economic observers said on Thursday.
According to InvestCap analyst Muneeba Saeed, the SBP’s recent market operations showed that the market participants continued to remain partial towards the shorter term government papers, of three-month maturities.
Thus, she said, the SBP might be forced to increase cut-off rates in order to keep borrowing from scheduled banks. “However, if SBP instead chooses to keep rates intact, the government would be forced to borrow from SBP instead thus inducing upward pressure on inflation,” the analyst said.
She said the central bank’s figures for money supply, also called M2, for the current fiscal year up to Feb 22 show a growth of 7.64 percent whereas the same depict a week-on-week (WoW) decline of 36 basis points. On a WoW basis the government’s borrowing increased by Rs 351 million, reaching a level of Rs 680.78 billion on 22nd Feb, they said. The incremental borrowing was backed by Rs3.461 billion borrowed for budgetary operations where as an amount of Rs 3.154 billion was repaid under commodity operations.
Under borrowing for budgetary operations head, during the week, the government retired an amount of Rs35 billion owed to scheduled banks thus bringing down the balance to Rs745 billion.
“We saw the gap being filled by borrowing from SBP instead where the government borrowed an incremental amount of Rs39 billion from the SBP as borrowing from the latter increased to a positive Rs20 billion as against negative Rs19 billion last week,” said Muniba.
She said the need for such borrowing to have emanated from lack of participation witnessed in the T-bill auction held on 20th Feb where the government targeted an amount Rs175 billion out of which only Rs 88.8 billion was realized.
From the total realized amount, Rs83.77 billion was in the short 3-month tenor as market participants avoided participation in the longer tenors due to anticipation of increasing rates after the upcoming MPS expected in Apr-13.
The SBP requiring an amount of Rs125 billion to retire maturities due (Rs96 billion for 6M T-bill and 28 billion for 3M T-bill), was only able to raise Rs 89 billion thus giving rise to reliance upon borrowing from SBP instead. In the auction held Wednesday, on March 6, the government targeted Rs125 billion in contrast to which Rs 148 billion was offered by various financial institutions.
From the offered amount only Rs132 billion was accepted (Rs135 billion face value). Major participation was witnessed in the 3M tenor which contributed 88 percent to total realized amount (Rs116 billion). The cut-off yields were seen inching up led by the government’s urgent need for funds. The cut-off yields in turn increased by 9bps, 4bps and 8bps for 3M, 6M and 12M T-bill respectively.