Investment in T-bills surged to a two-year high

Investment in T-bills surged to a two-year high

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

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

Central bank data shows that foreign investors resumed buying debt securities from January 2024, as the government offers one of the highest yields of around 21% worldwide.

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

Earlier, Finance Minister Muhammad Aurangzeb stated a few days ago that the devaluation of the rupee is not a condition for getting the new IMF loan program expected in June-July 2024.

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

Ashraf said if the exchange rate remains stable at the current level until the end of June 2024, it may remain stable after securing a new loan program – likely $6-8 billion over three years – in June-July 2024 as well, resulting in the attraction of more foreign investment in T -bills.

He said the central bank’s monetary policy committee may keep interest rates at their current high of 22% until September 2022, supporting the offer of higher returns on T-bills. This may encourage foreign investors to hold debt securities in the future.

He said foreign investors can continue to invest in the securities until interest rates are reduced cumulatively by 5% to 6%.

Ashraf added that market views were divided on the central bank’s first rate cut on Monday (April 29). Different polls show that a large number of participants predict the status quo at the rate due to the Middle East crisis, which carries the potential to raise oil prices. Second, Pakistan is currently negotiating a new loan package with the IMF, and the Fund continues to recommend that the central bank maintain a tight monetary policy to control inflation and improve the economy.

A significant cut in interest rates will lead to high use of foreign exchange services for imports, he said. This does not sit well with the country as foreign exchange reserves are low at $8 billion, which provides import cover for less than two months.

He is betting that the central bank will make the first cut in interest rates in September 2024 and will cumulatively reduce the base rate by only 4% to 19% by the end of December 2024.

He however expects that the rupee may depreciate gradually if demand for imports increases in the future. This may result in slower foreign investment in T-bills and Pakistan Investment Bonds (PIB) under the current cycle.

To recall, foreigners have invested a record high of $3.6 billion in rupee-denominated T-bills and PIBs up to the first month of the calendar year 2020. However, the outbreak of the Covid-19 outbreak at that time prompted investors to aggressively pull out a large portion of their investments in time few months.

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

Also, the rupee recovered partially on Friday after the country reported a 19-month investment of $182 million from overseas Pakistanis through their Roshan Digital Accounts (RDAs) maintained at banks operating in Pakistan.

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