Expected hike in discount rate to attract high yields in T-Bills

LAHORE: State Bank of Pakistan (SBP) is likely to hike discount rate in the coming policy announcement due on next week for next two months as it has been showed by rising inflation trend in the country which may benefit high realised amount of T-Bills in the subsequent auction.

Market participants are expecting higher cut-off yields in T-bill auction as yield of 3-month T-Bill in secondary market levelled as high as 9% after the announcement of consumer price index (CPI) for Jul-13 of 8.26% year over year (YoY) compared to 5.85% YoY in June 2013.

The inflation has seen a rising trend on a yearly basis as most of the commodity prices shot up on the back of upward revision in GST coupled with other government taxes. Other factors that contributed to the inflation hike include increasing petroleum prices due to rising trend in international oil prices over Syrian crises, 5% depreciation of Rupee against Dollar in two months, and increased power tariff by the government to minimise circular debt issue in the country.

The central bank, being unwilling to increase cut-off yield significantly, received the realised amount remained far below the targeted amount. During last four T-bill auctions, the total realised amount was Rs699 billion against target of Rs1,100 billion with no significant change in cut-off yields.

The participation in short term T-Bill (3-month) to be higher as compared to other maturities (6 and 12 months). However, certain increase in cut-off yields can’t be rolled out as minimal increase in three months T-Bill cut-off yields is being expected with major participation in the same.

However, participation in other tenors ( 6 and 12 months) is expected to remain at a lower side though the central bank needs to attract banks and investors to meet its borrowing target of Rs1,600 billion for government’s borrowing needs to support fiscal deficit.

The SBP will likely to rely on T-Bill auctions or fulfil the same from its own resources through Open Market Operations. The T-Bills auction will likely to be made through floating government papers in the stock exchange as per proposal of Ministry of Finance for generating funds for its purposes.

Analysts said that hike in interest rate would definitely improve the yields of T-Bills for long-term and short-term tenors but it will also benefit the government to realise handsome amount whereas the banks may improve their profitability with T-Bills and rise in discount rates.