By: Alfalah Securities Private Limited
SBP kept the discount rate & policy rate unchanged in its latest bimonthly meeting in line with our and consensus estimate. While the brief statement did not highlight the reason for status quo nor made any mention of the 3.6% fall in PKR during FY16TD, we believe headline inflation reversal going forward, recent weakness of PKR and imminent hike in US interest rates remain the key reason the status quo decision. For Nov-15, we expect CPI to clock is at 2.5%, which is expected to rise to 4.8% in 2HFY16. Consequently, we project a nominal reversal towards monetary tightening of 50bps in Mar-16 Monterey policy meeting.
FY14 saw revival in private sector credit offtake (PKR371bn), but dipped in FY15 (PKR209bn) and has again shrunk in FY16TD to PKR14bn compared to PKR45bn in the CPLY. We attribute this decline in private sector credit to reliance of government to finance its fiscal deficit from the scheduled banks instead of the SBP. In FY16TD, the federal government has retired PKR132bn to SBP, as opposed to receipt of PKR111bn in the CPLY. On the other hand, borrowing from scheduled banks has increased to PKR488bn compared to mere PKR105bn in the CPLY, largely financed through the persistent OMOs being done by the SBP to sustain the liquidity in the banking system.