The interbank market was expected to tighten in mid-April, as lumpy oil import payments at elevated prices coincided with the seasonal lean period for remittances. That process has now begun. Even so, there is no immediate stress in the interbank market: the SBP is still buying dollars, and banks are not short. The pressure is instead emerging in the form of backlogs in smaller payments, including contractual obligations and sight LCs, at some banks.
When asked when pressure on the currency would begin, one bank treasury officer replied succinctly: the central bank would start feeling the heat once the current account deficit crossed $500 million. The SBP needs around $400 million every month for debt servicing. If the deficit crosses $500 million, the SBP would surely come under pressure.
This might happen this month, but the market is likely to remain calm because, psychologically, there will be no panic until the numbers are published. Another important indicator is the SBP’s reserves, which must have declined due to the $1.3 billion Eurobond payment. However, the lower number has not yet been published.
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Once that number is released on Thursday, any failure by the SBP to rebuild reserves at least partly through market purchases could trigger some range anxiety. That nervousness may deepen further when the SBP makes the $3.5 billion repayment to the UAE. While news reports suggest Saudi financial support of $5 billion to cover the $4.8 billion repayment, the details remain hazy and the timing of the inflows is still unclear.
Falling forex reserves are likely to keep market anxiety elevated, much like range anxiety in BEVs.Much will depend on whether Saudi financial support materialises in time and, more importantly, whether the US and Iran are able to reach some form of understanding, as oil prices are likely to remain dangerously high until the fate of the Strait of Hormuz becomes clear. If a stable ceasefire emerges within the next couple of weeks, the currency may hold its ground. Fingers crossed.
The bigger concern now is interest rates, which could rise by 1–2 percentage points by June. Analysts expect inflation to come in at 11–12 percent in April, with the risk of it climbing to 15 percent in May and June. Secondary market yields have already moved up, signalling that expectations are shifting.
The government, meanwhile, is under growing fiscal pressure. Higher oil prices are adding to financing needs, while the Eurobond repayment has also required equivalent rupee liquidity to be arranged domestically. At the same time, the authorities are looking to increase fixed-income bond issuance to improve duration. That means larger amounts will likely be raised in upcoming auctions, but the market is unlikely to absorb them at current rates.
Hybrid Sukuks are also in the pipeline and are expected to raise Rs1.9 trillion by June, though whether they are truly Islamic is a separate debate. Their issuance could narrow, or even eliminate, the discount on Sukuk, bringing financing rates closer to those of conventional instruments.
Times are tough and liquidity is tight. Markets are likely to remain under pressure as long as war-related uncertainty persists.
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