Updated on May 24, 2002

The interbank money market went through a volatile phase the past week. The dearth of liquidity coupled with the war hysteria caused rates to remain at the 8.90% level. Term rates shot up sharply while on the other hand long dated T-Bills sellers were willing to off load them at levels higher than the auction cut-off yields. The kind of panic that was witnessed had been feared by the banking sector ever since the yields of T-Bills have touched record lows. The State Bank did come to the rescue of banks and intervened twice to provide respite in the shape of OMOs.

The shortness in the market that was created due to the outflow on account of the T-Bill auction kept the overnight levels at 8.90% with discounting ranging between Rs. 4.60 billion and Rs. 17.20 billion. The State Bank made an injection of Rs. 7.25 bln and Rs. 10.80 bln on the 20th and 22nd, respectively but these amounts failed to bring the market out of the continuing liquidity crunch that was worsened due to the tension on the borders of the country. Depositors were reported to have pulled out funds from banks due to the war like situation while tax outflows were also reported. This caused banks to pick up funds for the one week as high as 8.90% and 9.00% on Friday. The term call market was also hard hit with banks covering themselves hastily. This panic was mostly witnessed from the foreign banks side that quickly entered the market to cover up their open positions. One month repo and call were witnessed as high as 7.50% and 7.85%, three month repo and call at 6.50% and 7.10% while six month call activity was reported at as high as 7.50%. Furthermore banks having picked up one year T-Bill in the auction on the 16th of May also liquidated their papers and trades were reported at a high of 7.05%. It was on Friday that the term repo market eased off slightly as the State Bank announced an OMO for the coming Monday. The conditions in the interbank market also took a toll on the three and five year papers that were auction the past week. The cutoff prices for the three and five year papers were 100.16 and 100.26, reflecting the sentiment of the participants.

We feel that the market will continue to witness some volatility even though an OMO is scheduled for Monday. Banks holding onto longer dated papers will still be looking for an opportunity to offload their papers and we feel that buying interest in these papers would continue to be light. Further the State Bank would be willing to provide relief and may even come up with aggressive measures to assist the interbank market in case there is any worsening of the liquidity situation.

YIELD PROFILE
FEDERAL INVESTMENT BONDS
.	THIS WEEK	1 WEEK AGO	1 YEAR AGO
1 Year	07.10	07.10	12.25%
2 Year	08.00	07.60	12.50%
3 Year	08.70	08.50	12.75%
4 Year	09.00	09.25	12.75%
5 Year	09.75	09.55	13.00%
10 Year	10.75	10.50	13.50%

AUCTIONS
BID DATE	INSTRUMENT		RESULT		SETTLEMENT
May 15	T-BILL		May 15		May 16
TARGET AMOUNT		BID AMOUNT		ACCEPTED AMOUNT
Rs.6,000 Mln		Rs.48,125 Mln.		Rs.40,625 Mln

MATURITIES INSTRUMENT DATE AMOUNT T-Bill 02 May 22,000 Mln. T-Bill 16 May 5,200 Mln. T-Bill 30 May 14,407 Mln.

REPO RATES   THIS WEEK 1 WEEK AGO 1 YEAR AGO Overnight 08.90 08.93 08.00 1 Week 08.25 07.63 09.50 1 Month 07.00 06.23 10.70 3 Month 06.15 06.05 11.15 6 Month 06.55 06.30 11.35 1 Year 06.90 06.65 11.65

TREASURY BILL RATES MATURING THIS WEEK 1 WEEK AGO 1 YEAR AGO 1 Month 07.75 06.80 11.70 2 Month 06.75 06.20 11.30 3 Month 06.25 06.00 11.00 4 Month 06.40 06.15 11.35 5 Month 06.50 06.25 11.40