The bond market is expecting a rate cut soon while the forex players are expecting the currency to be under pressure, which dilutes the prospects of a rate cut. Nonetheless, the consensus view is of 100-200 bps cut in the next-to-next policy review to be announced on 29th April 2024.

In the latest T-Bill auction, which was relatively a smaller auction, the market did show some hunger. There was participation of Rs1,153 billion as against the target of Rs225 billion and maturity of Rs255 billion. And the government picked Rs557 billion with cut-off yields down by 29 bps in 3M and 43 bps in 12M from secondary market yields.

The general participation was at lower rates even though there was no call to treasury folks from the Finance Ministry (as perhaps there is no FM now), and the rates are down without any push from the Q-block. This suggests that the overwhelming majority of participants are expecting a rate cut within three months.

The market interest is in both 3M and 12M papers. The interest in the shorter term suggests that the expectations of rate cut are within 3M –the cut-off yield stood at 21.4 percent as compared to the discount rate of 23 percent (policy rate 22%).

Then neither the market nor the government is keen on 6M paper, as not only was the participation low (Rs80 bn) but the acceptance was even lower – the government picked a mere Rs10 billion.

The highest participation is in 12M papers where the bids were of Rs590 billion while the government fetched Rs309 billion at a cut-off rate of 20.3 percent. The consensus is that rates are likely to be down by 4 percentage points in 12 months, and it is better to pick more amounts till the rates are higher.

The risk to the story is currency, as inflation is mainly coming down in food prices -down from its peak of 55 percent to 31 percent, and one prime reason for its downward trajectory is stable PKR. Other prices are not coming down at a similar pace, as energy prices are still moving up, due to circular debt and upward stickiness of international oil prices.

Thus, falling food inflation is the reason for lowering inflationary expectations, and receding food inflation is relying on stable currency. And the treasury folks are not that comfortable on the currency parity.

Anyhow, a 2 percentage-point cut in the policy rate cannot be ruled out for the next few months. However, SBP should be cautious, as aggressive cut can become counterproductive, as this could enhance the pressure on currency depreciation. And SBP should not be dove in March, as it’s better to negotiate with the IMF for the upcoming review, before making a move.