Bloody Monday: Pakistani Capital markets in disarray after unexpected rate hike

The KSE 100 and the PKR down, while the KIBOR and secondary treasury bill yields rise

Karachi: Following an unexpected rate hike on Friday after market hours, the Pakistan Stock Exchange (PSX), the Rupee, and the secondary market yields suffered a battering.

Investor confidence is shaken after the State Bank of Pakistan (SBP) unexpectedly increased the interest rate last week. On the first trading day following the decision, the PSX benchmark index KSE-100 plummeted 865.39 points, losing 2.02% closing at 42,071.34 points.

The index remained on a downward trajectory, crossing down below the psychological barrier of 42,000 to touch an intraday low of 41,963.94 points.

“Stock market took the hit as the attractiveness of equities vs fixed income asset class further deteriorated,” says Fahad Rauf, Head of Research at Ismail Iqbal Securities. 

Continuing the negative trend of weakened confidence, the 6 month Karachi Inter Bank Offered Rate (KIBOR), surged 91 basis points in a day to touch an all time high of 16.81%. The 3 month KIBOR increased by 89 basis points to 16.76%, the 9 month KIBOR increased by 90 basis points to 17.07% and the 1 year KIBOR increased to 17.09%.

It is important to note that the 1 week KIBOR rose by 99 bps to 16.39%, 2 week KIBOR by 99 bps to 15.47%, and the 1 month KIBOR to 16.55%.

As per analysts, the rising policy rate, the government’s rising borrowing needs owing to the floods, and upcoming maturity payments are likely to persist as pressure on the KIBOR; which means this impact on the KIBOR is not a knee-jerk reaction.

“The markets reacted to a negative surprise in the monetary policy. Mostly the fixed-income market has been accurate in incorporating rate hikes, however, this time around, it was also caught off guard,” says Rauf.

“This resulted in post facto yields and KIBOR adjustment,” says Rauf. 

The secondary market yields also declined by 97 bps for the 3 month Market Treasury Bills (MTB), 104 bps for the 6 month, 106 bps for 1 year, 55 bps for 3 year, 45 bps for 5 year, and 56 bps for the 10-year MTB; bringing the yields to 16.75%, 16.83%, 16.86%, 14.77%, 13.74%, and 13.49% respectively. 

While not a significant drop, the Rupee shed further against the US Dollar (USD), depreciating by 0.01% and closed at Rs 223.95 against the greenback; quoting an intraday low of Rs 224.40.  This is the fourth consecutive day of loss for the rupee.

The SBP Monetary Policy Committee (MPC) hiked the policy rate keeping the inflationary pressures in mind. The MPC was of the view that inflationary pressures are stronger and more persistent than expected. The market, however, was not pricing in a rate hike. 

 

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Ariba Shahid
Ariba Shahid
The author is a business journalist at Profit. She can be reached at [email protected] or at twitter.com/AribaShahid

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