Monetary Policy #5: SBP painting GoP into the Koonda
It was less than three months ago that the Finance Minister threatened commercial banks with "Koonda". It appears that the banks need a refresher.
In an earlier post, I wrote that 18th February OMO would be something to look forward to as on the day, the first 63-day RRP will be maturing.
Later, assuming that SBP’s credibility is somewhat restored and that commercial banks have bought into the “pause” in the policy rate increase, I speculated that maturing 63-day RRPs will be rolled over into 7-day RRPs and that is what happened.
I am just an observer, but a market participant also believed the same.
Turns out we were wrong.
Latest T-Bill Auction
In the latest T-bill auction, the rates have again started to inch up.
There are two things to note here.
1. Bids didn’t even reach the target auction amount
The target was Rs.800 billion, and the total bids received are Rs.732 billion. SBP didn’t receive the bids for the entire amount. Does this mean the market is short of liquidity? Or that commercial banks aren’t interested in bidding for GoP paper, anticipating that the SBP will not offer the rates that they need?
But banks aren’t short of liquidity, as they bid large amounts in an earlier PIB auction, most of which SBP rejected on account of higher yields.
2. SBP rejected half of the bids
It is a function of cut-off yield. SBP could have raised more than Rs.367 billion, but it would have meant that the cut-off yield would have been higher. Thus, we shouldn’t assume that the cut-off yield represents the rate that the market is asking for.
Carry trade masquerading as liquidity shortage
I took a look at SBP’s Statement of Affairs. Monetary Policy Assets comprising RRPs mainly are at a historical high of Rs. 2.9 trillion.
In my last post, Monetary Policy Asset #4: SBP is encouraging carry trades, building on an earlier BR Research piece, I said that these are becoming permanent liquidity shortages.
We learned in Money and Banking 101 is that OMOs are done to inject or mop up liquidity, to keep the overnight rate in the interest rate corridor. RRPs, being of short nature, temporarily increase the reserves of commercial banks to allow them to meet either reserve requirements or to settle interbank payments. RRPs are supposed to be unwound/repaid at maturity by the banks when banks either arrange more permanent reserves or modify their balance sheet such that reserves are no longer required. Borrowing against RRP isn’t exactly cheap, as the current RRP rate is a little less than 10% p.a.
RRPs, by permanently remaining outstanding, are indicating that SBP’s recent OMOs aren’t textbook OMOs i.e. to help the banks meet their reserve shortfall or to help the overnight rate remain within the corridor. Permanent liquidity shortage is hinting at something deeper.
I concluded the post by stating that SBP is encouraging a carry trade.
To summarize,
- The current OMOs are not for [temporary] liquidity shortages.
- This is SBP encouraging carry trade in T-bills.
- This is an open secret in the money markets of Pakistan: Borrow short term on RRPs at 9.9% and lend to GoP for 3 months 10.4%.
Painted into a corner
This is the present T-bill auction schedule.
The target for Feb 23 auction was Rs.800 billion. Only Rs. 367 billion of the maturities were rolled over. At the next auction on March 9, Rs.1.1 trillion of T-bills are maturing. It appears GoP has painted itself, rather SBP has painted GoP into a corner.
Things to look forward to
There are two RRP roll-overs coming before the next T-bill auction on March 9th. February 25 and March 4. 63-day RRPs are maturing in those two auctions.
It will be fascinating to see what SBP does in the next few days. Things to look forward to in the monetary policy calendar
25 Feb and 4 Mar: Will SBP resort to 63-day RRPs again?
Size of Monetary Policy Assets (MPAs): At Rs.2.9 trillion, SBP’s RRP outstanding is at a historically high level. Will SBP reduce the MPAs or will it set a new high in the next few days?
Quantitative Easing: The SBP Act allows SBP to buy GoP securities from the secondary market. Instead of doing these 63-day RRPs, SBP can engage in QE to bring down yields on the GoP securities.
Interesting two weeks ahead.
Kis ka koonda ho ga phir
Do watch this short interview of Shaukat Tarin. It will be exactly 3 months old at the time of the next T-bill auction. History is truly repeating itself.