KARACHI, May 11: The average carryover transaction (COT) rate at the Karachi stock market, during the week ended Friday, dipped to 8.4 per cent, which analysts noted had possibly hit the pit. The reason of course was that the market was flush with liquidity.

Last week also saw inter-bank money market call rates moving in a very broad band of 3.5 to 8.5 per cent, which made Mohammad Sohail, head of research at InvestCap, to make interesting observations: “Every single book on finance and business says that a high risk security should command a higher return if the tenor of the investment is equal,” adding that the trend in the Pakistani capital markets belied that theory last week, when the overnight rates in inter-bank money market, stood at one time, higher than the rate in the overnight COT market.

The trend though intriguing, analyst ventured to understand and explain why investors did not scramble to switch funds from badla (COT) market to the low risk inter-bank market.

Previously when equity badla rates were higher than inter-bank rates, many banks (especially the foreign ones) did not shift their funds to the equity market as it was considered to be high- risk investment. But now that opposite was the case — badla rates were at levels with inter-bank rates — funds should theoretically have made their way into the safer money market from more risk- prone equity market. “A part of the reason for investors not opting to switch funds from badla to the money market could be due to the cost of transferring funds from the COT market,” says an analyst, adding that Central Depository Company (CDC) and other charges force badla financiers not to mature their investment too frequently.

But the analyst concludes that if the unusual situation of equal rates in both (money and COT) market continues for long, badla financiers could surely be tempted to transfer money to the inter-bank market.

But that said, it was also possible that due to the high volatility of rates in the inter-bank market — ranging between 3.5 to 8.5 per cent last week — many financial institutions and investors would have thought it prudent to be content with low rates in the COT (badla) market, then to venture out into the money market.

And finally, the non diversion of funds from equity to the money market, in spite of a radical change in rates, could also have to do with lack of knowledge on the part of an ordinary equity investor as regards the comparable advantage being offered by the two markets.