Money supply expanded by 5.24 percent in the first five months of this fiscal year; registering an increase twice as large as the same period, last year. All of the growth in money supply has emanated from domestic sources. So is another cut in the discount rate warranted? No; in fact the current situation demands a cautious stance from the apex regulator.
Rupee is slowly and gradually depreciating. SBPs liquid foreign reserves are falling - down 20 percent to 8.7 billion dollars in the past five months. Foreign exchange reserves are expected to come down further as analysts expect the forex tally at around six billion dollars by the end of this fiscal year. This would translate into a bare, two-month import cover.
The flipside is that inflation has kept on taming. Headline inflation is down to 6.93 percent in November (five-month average is 8.4 percent). Even trimmed core inflation is well in single digits as it was as low as 8.8 percent in November 2012. The five-month average is at 10 percent, in line with the prevailing discount rate.
Full-year inflation is expected to be in the vicinity of nine-10 percent. To keep the real interest rates close to zero, there is a good case for doves to dominate at the helm of SBP on Friday.
Market participants are expecting a rate cut as well. Research houses and banks treasury departments contacted by BR research are unanimous on a further rate cut - with most expecting a 50 basis points cut in the benchmark rate.
The secondary market yield curve is not factoring in expectations of a drastic slashing in rates as volumes in the one-year paper market are thin. Secondly, after the IMF harshly worded statement came out last week; yields have gone up by 20-30 bps depicting a no-change or 50 bps cut expectation for the policy rate.
The Fund did not exclusive comment on the monetary stance of the central bank. However it did state "Headline inflation has decelerated recently, but is likely to return to low double digits by the end of 2012/13. The external position has weakened substantially". The reading between the lines is that further monetary easing may attract calls for tightening from the Fund.
Considering all these factors and no respite for the fiscal deficit, no resolve to solve power sector woes, and a likely return to the IMF in coming few months; the chances for a 100 basis points cut appear thin.
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