Investment in T-bills soars to two-year high

Foreigners have pushed gross investment to a two-year high at $183.57 million in rupee-based short-term government debt securities (T-bills) following the return of stability in the rupee-dollar parity, helping the country’s foreign exchange reserves to remain stable.

According to the State Bank of Pakistan, the domestic currency appreciated by Rs0.09 and closed at Rs278.39 against the US dollar in the interbank market, ending the slow-paced cycle of nominal depreciation (0.5%) recorded in the past month.

Central bank data suggests that foreign investors resumed purchasing the debt securities from January 2024, considering the government is offering one of the highest profits at around 21% worldwide.

Speaking to The Express Tribune, Head of Research at Akseer, Muhammad Awais Ashraf, said foreign investors have taken positions in the debt securities based on the view that the rupee-dollar exchange rate would remain stable in the future, and the central bank would maintain the interest rate on the higher side in the short to medium term, supporting the offering of higher returns on investment in T-bills.

Earlier, Finance Minister Muhammad Aurangzeb stated a few days ago that rupee devaluation is not a condition to securing a new IMF loan programme expected by June-July 2024.

To recall, the exchange rate has remained largely stable for the past couple of months. It hit a five-and-a-half-month high at Rs277.03/$ in the last week of March 2024 from an all-time low hit at Rs307.10/$ in the first week of September 2023.

Ashraf said if the exchange rate remains stable at current levels until the end of June 2024, it may stay stable after securing the new loan programme – likely of $6-8 billion for three years – in June-July 2024 as well, resulting in attracting more foreign investment in T-bills.

He said the monetary policy committee of the central bank may maintain the interest rate at the current record-high level of 22% until September 2022, supporting the offering of higher returns on T-bills. This may encourage foreign investors to hold the debt securities in the future.

He said foreign investors may continue to invest in the securities until the interest rate is cumulatively reduced by 5% to 6%.

Ashraf added that the market view is divided over the first rate cut by the central bank on Monday (April 29). Different surveys showed a large number of participants foreseeing a status quo on the rate due to the Middle Eastern crisis, which carries the potential to spike oil prices. Secondly, Pakistan is currently negotiating a new loan package with the IMF, and the Fund has continued to recommend the central bank maintain a tight monetary policy to control inflation and fix the economy.

A notable cut in the interest rate would result in high consumption of foreign exchange services for imports, he said. This does not suit the nation considering the foreign exchange reserves are low at $8 billion, which provide import cover for less than two months.

He bet that the central bank would make the first cut in the interest rate in September 2024 and would cumulatively reduce the policy rate by only 4% to 19% by the end of December 2024.

He, however, anticipated that the rupee may gradually depreciate if demand for imports goes up in the future. This may result in slowing down foreign investment in T-bills and Pakistan Investment Bonds (PIBs) under the current cycle.

To recall, foreigners had invested a record high of $3.6 billion in rupee-denominated T-bills and PIBs until the initial month of the calendar year 2020. However, the then spread of the Covid-19 pandemic prompted investors to aggressively pull out most of the investment within a matter of months.

The inflows were attracted through offering higher returns and rupee-dollar stability at that time as well.

Moreover, the rupee has partially regained the lost ground on Friday after the country reported a 19-month investment of $182 million from overseas Pakistanis through their Roshan Digital Accounts (RDA) maintained at banks operating in Pakistan.

Additionally, the IMF executive board’s potential final approval for the release of the last tranche of $1.1 billion for Pakistan on Monday, stability in foreign exchange reserves near $8 billion, and a nine-year high current account surplus at $619 million in March altogether extended support to the rupee.

Published in The Express Tribune, April 27^th, 2024.

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