Badla investment declined drastically during last week as the badla phase-out plan entered its third week, resulting in liquidity crunch, sharply increasing the badla rates and futures spreads. The weighted average badla rate at KSE continued to rise for the second week in a row and went up from 12.7 percent of previous Friday (June 17) to 14.1 percent on last Friday (June 24).
During the week, badla rate went up as high as 14.9 percent on Thursday. Rates were high as the money market was tight during the week and banks conducted discounting following the rise in overnight rate to 8.9 percent.
Badla investment at KSE decreased to Rs 14.9 billion on Friday (June 24) from Rs 17.1 billion showing a decline of 13 percent on week-on-week basis. Badla investment decreased both because of lower volumes and slightly lower equity prices.
Badla volumes continued their downward march and were down to 147 million shares on Friday compared to 173 million shares on previous Friday (June 17). The reduction in badla volumes is much more than the scheduled phase-out plan requires.
The weighted average badla rate at LSE came down from 11.4 percent to 10.6 percent on Friday (June 24).
Badla investment at the LSE declined to Rs 1.1 billion from Rs 1.3 billion as volumes declined from 15 million shares to 12.7 million shares.
"As has been observed before June and December ending, the rates in the badla market surge as financial institutions pull out their funds from stocks to portray a better balance sheet", Faiza Naz, research analyst at Jahangir Siddiqui Capital Market, said. This, coupled with tight money market conditions, where discounting was also seen, caused badla rates to jump during the outgoing week. The weighted average badla rate at KSE was recorded at 14.1 percent compared to 12.7 percent recorded on previous weekend, an increase of 139 basis points.
Badla investment at LSE stood at Rs 0.98 billion against Rs 1.2 billion recorded on previous weekend. Badla rate at Lahore, however, decreased by 79 basis points, to 10.6 percent.
Due to liquidity crunch and reduced market activity at the year-end badla rates and ready-future spreads sparked and remained at the higher side during the out-going week.
Last week being the rollover week, the investors long in June futures had two options to transfer their position by selling June and buying July futures, or by using badla as a leveraging tool. But due to badla phase-out this option was not very supportive for accommodating huge positions. Therefore, in June futures case it was observed that most investors had used new futures contract to roll over their position as this is obvious by looking at the sharp increase in open interest in July contracts during the week.