MPS: Fundamentals justify a 50bps DR cut Written as on March 14, 2014 The current appreciation in Pak Rupee against USD has changed the entire scenario of inflation outlook. As PKR appreciation is expected to further ease-off the CPI if the government passes on the impact of this appreciation to oil prices. Moreover, this appreciation of PKR is also likely to lessen the imported inflation. In addition to this, the declining trend in secondary market yields of government papers on the back of DR cut expectations, also largely visible in inter-bank market as the same reveals the true sentiments of the market participants regarding discount rate. In todays Value Seeker we discuss the above mentioned factors and their impact on the discount rate. Better FX position paving the way for DR cut by 50bps After touching all time high of Rs110.10/USD on November 28, 2013 in inter-bank, the green back depreciated by 9.5% to 99.70/USD as of yesterday closing. The Inflow amounting USD1.5bn from Saudi Arabia is the major factor behind this sudden appreciation in PKR against USD. Moreover, expectation of further FX inflows is also in pipeline which would be materialized in remaining FY14. The strong possibility of such inflows is expected to yield better current account hence the prices of imported products are likely calm down in local markets. In case the government passes on the impact of PKR appreciation by 5% in the form of easing-off fuel prices then we expect it to reduce inflation by 40-50bps directly. If the things happen accordingly, the CPI for Apr and May -14 would be settled around at ~7.30% by leaving real interest rate at 2.7%. The scenario allows cushion for a discount rate cut by 50bps to 9.5% in upcoming Policy Statement. Secondary Market yields on their downward trajectory After receiving USD 1.5bn from Saudi Arabia , the yields in secondary markets eased-off by ~40-50bps on the expectation DR cut in the tomorrow’s Monetary Policy Statement. Outlook: IMF factor may leads to status quo in DR Going forward, we expect, low inflation to prevail in remaining period of FY14 as the high-base impact is expected to continue supporting CPI to stay in single digit. 12-month moving average CPI is anticipated at 8.5%-9.0% for FY14. Moreover, appreciation in PKR against USD coupled with stable international oil prices could also support CPI to remain at lower levels thus paving the way for a 50bps DR cut. However, in the last IMF and GoP LoI, the donor wanted to adopt tightening monetary policy therefore the government will consider the IMF contemplation. In case of DR rate cut, the highly leveraged sectors including Cements, Textiles, Power, Fertilizers will take the benefit in the form of reduction in finance cost. However, the same can be negative for banks with higher percentage of time liabilities. Abdul Azeem azeem@investcapital
Posted on: Sat, 15 Mar 2014 10:54:51 +0000
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