Policy Rate Cut Hopes Stave Off Bloodbath in Pakistan Stocks

Policy Rate Cut Hopes Stave Off Bloodbath in Pakistan Stocks

Pakistan’s stock market experienced a rollercoaster ride on Friday, narrowly avoiding a significant decline thanks to hopes of a policy rate cut by the central bank.

The benchmark KSE-100 index ended the day down by just 109 points, closing at 73,754 compared to the previous day’s 73,863.

The session started with a heart-stopping plunge. Intraday trading saw a massive fall of 2,081 points, fueled by rumors circulating about potential tax hikes in the upcoming budget for fiscal year 2025. These rumors suggested that capital gains and dividend tax rates could be raised to match the standard personal or corporate income tax rates, with the highest income tax bracket potentially reaching 45%.

This prospect sent shivers down investors’ spines, leading to a sharp decline in the index. However, as the day wore on, cooler heads prevailed. Investors started buying back shares, buoyed by two key factors: significant policy rate cut in the upcoming monetary policy meeting scheduled for Monday and the unsubstantiated nature of the tax increase rumors.

The market is eagerly anticipating a significant policy rate cut, with estimates ranging from 100 to 200 basis points. This cut, coupled with the fact that the stock market has already seen a sizeable decline of 2.8% on a week-on-week basis, helped mitigate the initial losses.

The final tally showed the KSE 100 Index settling at a mere 0.15% lower than the previous day’s close after the reports of policy rate cut. Although some major companies like MEBL, PPL, HBL, and UBL lost value, dragging the index down by 302 points, the anticipated policy cut cushioned the blow. Additionally, the trading volume and value for the day remained relatively stable at 559 million shares and Rs 20 billion, respectively.

The upcoming monetary policy committee meeting on June 10th, 2024, is a focal point for the market. Declining treasury bill yields and falling KIBOR rates have fueled expectations of a substantial policy rate cut. This cut, if implemented, is expected to inject much-needed stimulus into the economy.

Looking back at the week, the KSE 100 Index had already declined by 2.8% due to investor concerns surrounding potential austerity measures and additional taxes in the upcoming budget. However, positive developments like a significant drop in inflation (11.76% YoY in May 2024 compared to 17.34% in April 2024) and a shrinking trade deficit (down 15% MoM to US$2.1 billion in May 2024) offered some solace. The week also saw a healthy increase in foreign remittances, with May 2024 figures reaching US$3.2 billion, a 15% increase month-on-month and a staggering 54% year-on-year jump.

While the market navigated a volatile week, hopes of a policy cut ultimately prevented a freefall. The coming days will be crucial, with the central bank’s decision and the unveiling of the budget likely to significantly impact investor sentiment.