MPC: Growth Push vs Rupee Stability

Tresmark: Key factors for holding rates on the monetary policy meeting on Monday
– IMF influence
– Support for Rupee

Key Factors for cutting
– spurring some quantum of growth
– Real interest rates in the +3-4% on a forward looking basis*
– supporting contracting LSM
– some breathing space in the interest servicing costs

Inflation projections for FY26
Tresmark 6.1%
GoP 7.5%
IMF 7.7%

Market expectations
– In a poll by Tresmark, 68% said there will be no change.
– Trade flow, however suggests markets are expecting a 50-100 bps rate cut. PKRV curve has dropped 90bps since last MPS and 50bps since last 3 auctions

Our View
If the eventual target policy rate is 10%, the committee may choose to reach it gradually. Hence, we are expecting a 50bps rate cut come Monday

Why a rate cut won’t hurt the Rupee
– Private sector credit is already shrinking, and investment portfolios have largely been repositioned.
– A minor rate cut won’t impact inflows significantly.
– The Rupee is being actively managed, with market dynamics having limited influence on actual rates.

Huge inflows, but no dollars
While remittances clocked another amazing month at $3.7bn, Banks are short in their nostros. Import payments are being delayed and piling up. Analysts are of the opinion that banks are told to manage their inflows and outflows without buying from the interbank, which puts a lot of pressure allowing imports. But when the central bank comes and buys dollar to build up reserves, it skews the equation

Reserves building
There seems to be an IMF driven target to achieve a $16bn SBP reserves balance. To that tune, SBP aggressively buys off any excess liquidity. We believe SBP will achieve this target if the $1.4bn climate financing is received (expected) and if the Finance Ministry is able to borrow $2bn from middle eastern banks (again expected). Pakistan is also preparing to repay part of the $500mn Eurobond in September.

Rupee Projections
As mentioned in the past many notes, we expect Rupee to shed 20-25 paisa each week. This pace increase in the lead up to June 30th before the reserves target deadline. In the last 10 days we saw Rupee weaken by 100 paisa, where as in the last 3 months it weakened by about 300 paisa. Expect Rupee to close this fiscal around the 284.50/$ level

Other Factors
– Reserves building is not the only factor in Rupee depreciation
– Regional currencies have also weakened, with INR and Takka depreciating by about 1.50% in the last 1 month

Rupee medium term
Rupee looks to consolidate in July as some pressures ease and as Dollar weakness against other global currencies come in to play
– DXY (Dollar index) has dropped further to 98.4
– More clarity on Tariff structures
– Brent, which has climbed from $64 to $74 this month may settled to more feasible levels
– Pakistan eyes new Eurobond and Panda bond issuances following improved ratings

The wild card would be a disproportionate escalation of the Iran – Israel conflict

USD/PKR
• 1 Week: 283.50
• 1 Month: 284.50
• 1 Quarter: 285.00
EUR/USD
• 1 Week: 1.1517 (Sideways)
• 1 Month: 1.1395 (Bearish)
• 1 Quarter: 1.1423 (Sideways)
GBP/USD
• 1 Week: 1.3447 (Bearish)
• 1 Month: 1.3309 (Bearish)
• 1 Quarter: 1.3480 (Sideways)
USD/JPY
• 1 Week: 143.50 (Bearish)
• 1 Month: 144.68 (Sideways)
• 1 Quarter: 141.86 (Bearish)
Oil WTI
• 1 Week: 70 (Sideways)
• 1 Month: 66.6 (Bearish)
• 1 Quarter: 66.2 (Bearish)
Gold
• 1 Week: 3440 (Bullish)
• 1 Month: 3216.25 (Bearish)
• 1 Quarter: 3197.50 (Bearish)