The summary of the piece was that SBP has lost credibility when it comes to its monetary policy statement, forward guidance, and threats. The only arrow left in its quiver that seemed to be working so far was the 63-day RRP. SBP conducted a 63-day RRP on May 27 for Rs.1.8 trillion. I predicted that this will result in yield in T-bill auctions going down by 25bps.
What SBP is doing here with the 63-day RRP, is lending money to banks for two months at 13.84% in the hope that, if the recent past is any guide, in the next T-bill auction, the banks will lend to GoP at a spread of 40-50bps over the RRP rate i.e., 3M T-bill cutoff at 14.24%-14.34%. The previous 3M cutoff was 14.5% (See below). Thus, SBP is trying to bring down the cutoff by another 16-26bps. Moreover, while the target for the auction is Rs.750 billion, it is expected that banks will lift a higher amount as the RRP was for Rs.1.8 trillion.
I was so wrong. Instead of the cutoff going down by 25bps, it went up by 75bps. Instead of the 40-50bps spread that the banks made over 63-day RRPs earlier, this time the banks made off with a juicy spread of 1.40%.
SBP ended up with an egg on its face with its credibility in the pits. It is not just me. Other analysts were also caught off guard.
Surprisingly, SBP conducted another 63-day RRP on June 3. The amount was smaller compared to the previous auction at Rs.783 billion. Thus, of the Rs.3.3 trillion RRP outstanding as of June 3, 80% is in 63-day OMOs with only Rs.692 billion in 7-day RRPs. June 10 OMO will be interesting.
Another trick up the sleeve
Today, SBP issued another circular where DFIs are also allowed to participate in the OMOs.
What is going on here? I don’t have DFI officials on my Rolodex, but I can speculate. First, let’s recap what approaches have SBP and MoF tried so far:
Threaten the banks, e.g., Shaukat Tarin warning the banks to behave otherwise there will be Koonda.
SBP called the increase in T-bill yields “unwarranted” in its Dec 14, 2021, monetary policy statement (no wonder SBP has lost credibility). This was followed by roping in the Competition Commission of Pakistan (CCP) to probe suspect cartelization in T-bill auctions. Even Ali Khizar tweeted about the “collusive behavior” of banks at one time. And yet the banks refuse to bid lower.
63-days RRP which worked earlier this year but, as of last week, is no longer working.
This is what I think is happening. As banks are refusing to be cajoled to bid at lower yields in the T-bill auction, SBP is trying to get other financial institutions to participate in the auctions with the hope that higher participation will result in lower yields. Moreover, unlike the commercial banks where the treasuries are answerable to their owner Seths and try to maximize profits, DFIs aren’t exactly motivated by higher profits and have no Seths to answer to. Hence, there is a possibility that DFIs will bid lower if SBP “encourages” them to bid lower.
SBP may have reached out to DFIs for increasing their participation in T-bill auctions, and DFIs may have responded that their liquidity is already completely invested in T-bills. Hence, SBP came up with the above circular.
Thus, by participating in RRPs, the DFIs will sell their existing T-bills to SBP for reserve balances/cash. And in the next T-bill auction, the DFIs will use this cash to buy T-bills. Thus, the participation in the next auction is expected to be higher, which should result in lower yields.
What to look forward to?
June 10: The RRP balance touched Rs.4 trillion (a historical high) at the end of April and is now back to Rs.3.6 trillion at the end of May. What will be the tenor of RRPs in the next auction, and what will be the outstanding amount? For my substack’s sake, I am hoping for the RRP balance to set a new historical record in the oncoming OMO.
June 15: Higher participation and lower yields in the T-bill auction.
