The Pakistan Stock Exchange witnessed a bloodbath as the KSE-100 Index was down by 865 points on Monday after the State Bank last week unexpectedly decided to hike policy rate by 1 percent.
On Friday, the KSE-100 Index had closed at 42,936.73 but the State Bank’s decision that came late in the evening on the same day triggered this slump with the start of first business session since then.
As the market closed on Monday, the index was recorded at 42,071.34 after 2.02 percent drop.
The trend started with the very beginning as the first the KSE-100 Index dropped by over 600 points in the first 30 minutes of the trading.
However, it is not just the 1 percent (100 basis points) hike in policy rate as political uncertainty caused by PTI Chairman Imran Khan’s announcement on Saturday that they would mull over resigning from or dissolving the Punjab and Khyber Pakhtunkhwa assemblies.
First National Equities Limited Director Amir Shehzad says the market was under pressure due to the “unexpected” increase in the policy rate by 100 basis points.
He suggested that investors should adopt the strategy of buying the dip — a term used for the purchase of an asset after it has dropped in price — as oil prices were decreasing in the international market.
Moreover, he estimated that the increase in the policy rate was due to the International Monetary Fund’s (IMF) “pressure” and that the “release of the next installment by the IMF would now be easier”.
“Inflows are also expected and things seem to be settling politically too,” he said, adding that in such a scenario, buy-on-dip strategy would be suitable.
Policy rate hiked by 100bps
The State Bank on Friday had increased the policy rate by I percent from 15 to 16 percent, as it cited high inflation which is continuous and more than expectations.
Amid the prevailing economic situation, it was already expected that there won’t be any cut in the policy rate, but the State Bank instead decided to increase the same.
The announcement came after a meeting of the SBP’s Monetary Policy Committee (MPC) as the central bank identified higher food and core inflation as “key contributors” to alarming rise in inflation.
It said the decision to hike the policy rate was aimed at ensuring that “elevated inflation does not become entrenched and that risks to financial stability are contained, thus paving the way for higher growth on a more sustainable basis”.
However, the move triggered the stock market’s immediate slump instead of the stated objective of financial stability.