The majority of the action was taking place in the money markets while discussions with the International Monetary Fund (IMF) and rupee volatility took center stage. Increase in interest rate is expected this week, according to Tresmark.
With the current inflation trajectory and potential future increases brought on by the increase in tax, gasoline, and energy prices, the majority of traders have bet on a 200 bps increase.
Banks did not bid vigorously in the most recent auction, which was ultimately abandoned, despite being long and liquid in the money markets where rates have grown by around 100 basis points in the shorter tenors.
The State Bank of Pakistan (SBP), which frequently uses OMO to boost funding of bond investments, did not infuse any funds either.
Impact of Increase in Interest Rate
A 2% interest increase would bring the policy rate interest to 19%, the highest level since 1996, and present dollar holders and exporters withholding their profits with a tantalizing problem.
The carrying cost of dollars abruptly ceases to be feasible, according to Tresmark. Yet, this significant increase in interest rate would also stir up a hornet’s nest in which companies may not be able to pay their debts due to a sharp downturn in the economy and imports.
However, it appears that the increase in interest rates and inflation will take precedence over economic health.
The rupee showed a spectacular recovery, reaching an intraday high of 262.25/$ yesterday, after having the worst week, in which it traded as low as 278.50/$ (intraday).
The SBP circular, which effectively prevents exporters from parking their foreign exchange outside Pakistan for longer than the allotted period, was one important element in this reversal.
Despite the fact that the circular takes effect on March 1st, the majority of exporters do not wish to wait until then and instead sell their export earnings and forward inflows in the market, with some even aggressively discounting their future bills.
Retail speculators, who have been busy selling with fewer and fewer buyers, have also been hurt by this Rupee reversal in the interbank market.
The Central Bank, which has been busy buying the surplus liquidity to shore up their reserves while letting USD/PKR drift lower, has been delighted by this unexpected inflow from exporters and speculators.
No one is certain why SBP’s reserves increased in the week ending February 10; nonetheless, they are likely to do so in the week ending February 17. The overall reserves of the nation increased by $163 million.
Tresmark in its report said, “While the Rupee should stay in the 262-265 range for now, there will surely be some outruns to levels below 260. These outruns are not expected to stay beyond the 2-week time frame.
The 2 key reasons for this view are that SBP is still holding off imports and new LC issuance, to the detriment of industries and the IMF, and sooner than later they will have to resume near-normal operations.
The other reason is that SBP is buying the excess dollars off the market and they will have to support the market at some level to optimize maximum mop-ups.”
Experts are disappointed that the IMF has not released any encouraging progress statements in spite of significant “prior actions.”
The mini-budget, which is anticipated to be adopted early next week, has also been presented by the Ministry of Finance (MoF). Analysts wonder what is preventing the Fund from progressing.
Despite the aforementioned, most traders think the IMF clearance will materialize and this will make the increase in interest rates, but possibly later than the market anticipates.
Analysts note the continued IMF controversy as well as the nation’s growing political unpredictability, which has the potential to upset the apple cart.
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