In a surprising move, the central bank kept its key policy rate unchanged at 10pc in its March 15 monetary policy review.

The decision was puzzling because inflation in January and February had shown a downward movement, and the rupee’s amazing gains — 6.5pc against the dollar between March 1 and 12 — had provided an additional reason for cutting interest rates.

While acknowledging both factors, the SBP, in effect, said in its monetary policy statement that it is wiser to wait for further evidence of more reliable sources of external sector inflows, and for the government’s action to retire central bank debt, which is most inflationary in nature.

The rupee’s rapid rise was, by and large, the result of a one-off $1.5 billion Saudi funding into the Pakistan Development Fund. And the government’s fresh fiscal borrowings from the SBP between July 1, 2013 and March 7, 2014 was in excess of Rs500 billion.

“But as improvements in permanent sources of forex flows like exports, remittances and foreign direct investment (FDI) are becoming increasingly visible, and as key factors fuelling inflation are sure to lose weight, monetary easing is not far away,” says a senior official of the finance ministry.

He also points out that the government has started borrowing more from banks (a reference to Rs243 billion gross borrowing through T-bills on March 19), and is now going to retire central bank debt, thus mitigating one key factor behind inflation.

“Even otherwise, inflation has remained stable for the last two months. Wheat harvesting has begun, industrial output is growing faster than expected [over 6pc in July-January FY14], and domestic fuel oil prices are going to remain under control due to the stronger rupee. Therefore, inflation should show some moderation,” says another senior finance ministry official.

Stockbrokers point out that despite the SBP’s decision to keep the policy rate unchanged, the Karachi Stock Exchange not only remained bullish, on balance, but its 100-index hit new heights. Normally, when the central bank doesn’t go for a widely expected rate cut, stock indices decline or remain flat.

“But things are changing,” says a former KSE chairman. “After the linking of banks’ minimum deposit rate (MDR) with the SBP’s repo rate [last September], stock prices have not responded to policy rate changes the way they used to. Now, banks can’t slash deposit rates on the excuse of policy rate cuts. This means that in case of any policy rate reduction, depositors can’t be expected to shift part of their bank savings immediately into stocks.

“Similarly, when the policy rate is not changed despite wide expectations, stocks move forward for other reasons, like growth in industrial sector, rising trend in corporate profitability and increasing interest of domestic and foreign investors.”

Central bankers say one of the pros of the SBP’s no-rate-change policy is that it is going to keep alive the current growth momentum in banks’ deposit mobilisation, and thereby discourage expansion in currency in circulation, which has been growing rapidly in this fiscal.

“After the linking of banks’ MDR with the SBP’s repo rate, a change in our policy rate [reverse repo rate] was bound to reduce our repo rate as well. That, in turn, would have lowered banks’ MDR, thus discouraging savers.”

Senior bankers say the SBP’s decision to keep the policy rate intact also weighed in on the fortnightly auction of Treasury bills on March 19, wherein weighted average yields on three-month, six-month and one-year bills remained almost unchanged at the March 5-auction level.

“This was largely because the government’s borrowing needs were high. And banks knew that the government’s borrowings from them would continue, as it is now retiring its central bank debt. That’s why their offered rates for T-bills were not too cheap, even though there was enough liquidity in the market,” says the chief money market dealer at a large local bank.

Bankers say as a result of unusually large forex inflows during March, net foreign assets (NFA) have started growing much faster than before. And net domestic assets (NDA) have already been high due to a big rise in private sector borrowing, and also due to unabated government borrowing from the banking system.

The net impact of growth in NDA and NFA is that broad money (M2) will now speedily expand. “Had the SBP lowered its policy rate, this would have provided more impetus to growth in M2, and that would have been inflationary,” says a senior central banker.

Bankers say as the rupee is holding on to its recent gains and forex reserves have reached nearly $10 billion, and with manageable end-quarter external debt payments in March, exchange rates may remain somewhat stable till the SBP announces its new monetary policy in mid-May.

“That would be a more opportune time for monetary easing, if all other factors call for it,” says the president of a mid-sized bank, while admitting that the SBP’s current decision of keeping interest rates stable came as a pleasant surprise for banks. “A rate-cut at this stage would have dented our interest-based profit growth.”