Anticipated strong rebound may reverse current declining trend in interest rates in 2H: First Capital Research

The anticipated strong rebound of the economy and upcoming elections could put pressure on the interest in reversing the current declining trend in the interest rates, in the second half of the year, according to First Capital Research (FCR).
However, FCR in a recent report noted that the trigger events, which include the timely third tranche under the International Monetary Fund programme, timely completion of the external debt restructuring, anticipated subsequent rating upgrade and enhanced liquidity, may push the Treasury securities yields lower.
“The economy has already started to recover with improving economic activity and upcoming elections, which may increase consumer demand and imports leading depreciation pressure and increased demand for credit building pressure on interest rate,” FCR stated. 
The surge in liquidity in the banking system directly resulted towards the reduction in the Treasury yield curve and average weighted lending rate, after April this year.
The slower economic conditions supported the balance of payments surplus in the economy, resulting from slower than anticipated imports and surge in tourism and worker remittances. Accordingly, the Central Bank took advantage of the stronger rupee created by these factors, to strengthen the foreign reserve position by purchasing US dollars from the market, improving the reserves to US $ 5.4 billion. This resulted in releasing the rupee to the market, creating a surplus of over Rs.100 billion in the banking system. 
However, driven by a strong economic rebound, FCR predicted a likely upward movement of around 100 basis points in the Treasury bond yield, in the second half of the year.
Meanwhile, FCR believes a higher likelihood of the Central Bank to hold the policy rates steady during the remainder of the year.
“With most economic indicators, including the GDP growth, continuing to significantly improve while the currency also registers a steep appreciation, FCR believes that the Central Bank may take a stance to maintain the policy rates through the rest of the year, maintaining at the current level of 8.50 percent and 9.50 percent for SDF and SLF,” FCR elaborated. 
As the Central Bank has announced the adaptation of a single monetary policy window, FCR noted that this would likely lead to an adjustment in the SDF or SLF or both.