Kibor may fall by 50-75 basis points

The base lending rate Kibor is expected to fall by 50 to 75 basis points in the wake of a 150 bps cut in SBP's policy rate while the six months forward cover for the US dollar is also expected to reduce. Market forces have already factored in around 50 bps in the rate with Kibor showing a downward trend since August 1st this year.
There is bound to be a downward rally in the bond market. However, experts feel that it would be short-lived unless the market players factor another 150 bps cut in SBP's policy rate in the next two months.
Banks are already holding securities equivalent to 40 percent of their Time and Demand deposits and have shortened the market which will result in a downward rally. However, the downward rally will be short-lived and a huge downward rally may not be sustainable. PIB yields are expected to drop from a range of 12.70 - 12.90 to settle at 12.25 - 12.50.
Last Friday, the government failed to stick to its commitment to convert Rs 400 billion in power sector and commodity loans to bonds. Once this is done the advance to deposit ratio (ADR) of banks will reduce from an average of 63/64 to 56 percent, thereby enabling them to lend more - as their choked balance sheets get unclogged. Banks were first promised settlement on September 24th, and later on October 7, but both times government failed to keep its word.
Bank treasuries in Pakistan tend to have a herd psychology and have tendency to book profits and then sit back, argue the experts. SBP has already injected Rs 298 billion of liquidity in the market.
The Saturday policy rate cut has, however, one danger. The incentive for commercial inflow of forex for investment in Pakistani bonds (T-bills/PIBs) stands eroded. Pakistan is rated three notches below junk bond with risk factor at around nine percent. 200 to 250 million dollars of inflows materialised as overseas bond holders earned a carryover of 4.0 percent above the risk factor at a return of 13 percent. It is now feared that these forex inflows could now dry up as the carryover premium over country risk has eroded to one to 1.5 percent, thereby making these bonds less attractive.
Rupee is expected to gain strength on Monday (today) not because of policy rate cut but from orders from Islamabad to SBP to intervene and stop the rupee from depreciating. Interior Minister Rehman Malik held a meeting with SBP officials and exchange companies' representatives on Saturday asking the both to stoutly defend the rupee. He was told that the volume of the official market is $50 billion while the volume of trade in open market was $4 billion a year. However, rupee in the open market is expected to remain under pressure as Haj pilgrims (150,000) are not getting their 1,000 Saudi riyal quota for expenses from the banks. Instead this year exchange companies and money changers have been asked to meet their needs. Most of them will take dollars equivalent to 2,000 riyals instead of 1,000 riyals officially allowed, say market sources. Therefore, the parity will be demand-driven for over a month.
The SBP will have to inject much more liquidity into the system to compensate for the policy cut. The Pak rupee could come under more pressure and SBP does not have the luxury to fritter away forex reserves.