KARACHI, Jan 31: Market participants at the Karachi Stock Exchange reacted sullenly at the discount rate hike by the State Bank of Pakistan on Thursday, though most of them admitted that the measure was expected and generally factored into the share prices.
The central bank announced increase in discount rate by 50 basis points to 10.5 per cent from 10 per cent. Given its linkage with Kibor, analysts said that the eventual rise in interest rates would put heavier burden on companies in the throes of expansion or those that were highly leveraged.
Mr. Siddique Dalal, a former director on the KSE board commented that the tightening of monetary policy was necessary to arrest the rising rate of inflation. He stated that the ‘cost of doing business’ for the manufacturing sector would, nonetheless, increase.
Along side the discount rate hike, the SBP had also announced tighter CRR measures for banks. Mr. Dalal said that for the short time at least it could have an unsalutary effect on the bottom-line of banks.
The oil and gas sector, he believed, would remain immune from the effects of hike in interest rate, possibly because of their rich cash flows.
Mr. Faisal Shaji, head of research at Khoja’s Capital observed that the SBP appears to have extended its hand at correcting the asset-liabilities mismatch of banks, going forward.
He said that the aim seemed to be to encourage banks to concentrate on the growth in their long-term deposits, switching from the current penchant at keeping the biggest amount in current accounts.
But he contended: “The increase in discount rate is a demand side measure, which is unlikely to be effective in controlling inflation”. He thought that the central bank and the government needed to do more on the supply side, such as the flow of food items and growth in agricultural products.
Analysts at most stock brokerage firms said they would come up with an elaborate report on Friday. Off hand, most equity dealers thought that banks would be pushed further to raise interest rates, which could show a bit of a slide in their incomes.
Companies in the fertiliser, cement and textiles which carry heavier debts on their balance sheets would also be unhappy with the rise in interest rates. But oil and gas exploration sector - which has the highest weightage in the composition of KSE-100 index - was likely to be able to duck the blow.
An analyst, nonetheless, said that the SBP’s blow was the lightest in comparison to open market operations. A stock strategist mused that since the rate of 10 year PIBs had increased to 8.5 per cent and the SBP had earlier this week scrapped the T-bill auction, people took it as a subtle hint that the discount rate increase may be around the corner.
Given the government’s desperation to arrest inflation, the tightening of monetary policy - in the way the bank thought fit—was taken.
A stock trader said that he expected the rate of interest on Continuous Funding System (CFS), the rate at which investors buy shares on borrowed money at the stock exchange, could witness some increase.
On Thursday, the CFS average rate was 10.8 per cent and CFS value at Rs52 billion. The regulators have put a cap on the maximum CFS interest rate at 18 per cent and investment under CFS at Rs 55billion.
It has to be seen if interest in equity investment could be sparked by an end to the concerns over the SBP monetary policy. The suspense had kept the stock market trade in an exceptionally narrow band of between 50 points on Wednesday and Thursday.
Several market participants thought that the main worries for the market remained. Those were global stock market slump and the fears of an impending US recession. But the biggest of them all, was the concern over the political developments in the country, going forward.
“Until the elections are held on Feb 18 and clouds of uncertainty dissipate on the political front, it would be churlish to think of a boom in the stock market,” muttered an old time broker.