Benchmark Treasury bill rates fell at this week’s primary market auction with banks expecting the single digit interest rate environment to last another year on the grounds that inflation is expected to remain subdued.
There was high demand for government securities over the past few weeks as banks preferred to invest their excess liquidity in Treasury bills and bonds, rather than lend to the private sector, and banks were willing to accept lower yields on Treasury bills on expectations that the Monetary Board of the Central Bank would be compelled to cut policy interest rates further in order to stimulate economic activity by increasing credit to the private sector.
The Public Debt Department of the Central Bank offered maturing Treasury bills amounting to Rs. 11 billion at this week’s auction. Bids from commercial banks amounted to Rs. 27.4 billion, with the twelve month Treasury bill attracting over Rs. 17 billion.
The Central Bank accepted Rs. 5.59 billion of the bids for the twelve month bill which saw its yield fall 36 basis points to 8.18 percent from last week’s 8.54 percent.
The six month Treasury bill attracted bids amounting to Rs. 7.5 billion of which Rs. 4.5 billion was accepted while its yield fell 16 basis points to 8.14 percent. The yield on the three month bill fell 24 basis points to 7.40 percent as the Central Bank accepted Rs. 1.2 billion from bids amounting to Rs. 2.5 billion.
The total accepted by the Central Bank for the Rs. 11 billion worth of bills amounted to Rs. 11.37 billion.
Dealers said the auction reflected market expectations that the Central Bank would announce a further cut to policy interest rates today. Policy interest rates stood at 7.25 percent and 9.50 percent for the repo and reverse repurchase window respectively.
"There is excess rupee liquidity in the banking system, which is around Rs. 26 billion, and with private sector credit slow in picking up due to low demand and the absence of quality projects to lend to, the best place to invest these funds is in government securities," a dealer said.
"We expect policy interest rates would be cut further so as to stimulate private sector credit growth and enhance economic activity," another dealer said.
"The fall in Treasury bill yields is a signal that banks are confident that interest rates would be low in the medium term as inflation remains contained at low levels. A low interest rate environment would also help the government contain high budget deficits.
"Firstly the high interest costs would be reduced, and with the low interest rates once private sector credit improves leading to increased employment and production, tax inflows would also improve," a dealer said.
The high rupee liquidity levels, averaging Rs. 30 billion each day over the past few weeks, was caused when high inflows of short term foreign investments, mainly to the stock market, were converted into rupees, dealers said. This is placing pressure on the rupee to appreciate.
Last afternoon, the dollar was trading at Rs. 112.30/35.
source - www.island.lk
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