November 6, 2019 (MLN): In a widely expected move, the Government of Pakistan reduced the profit rates on various National Saving Schemes (NSS) on Tuesday night.

As mentioned earlier, the profit rate on Defense Saving Certificate have been cut by 2.33% to 10.68%, rate on Pension Behbood cut by 2.28% to 12.48%, Rate on Regular certificate cut by 2.04% to 10.92%, rate on Special saving certificate cut by 1.70% to 11% and rate on saving accounts cut by 2.05% to 8.20%.

It wouldn’t be difficult to infer that slash in the rates of these certificates has been caused by a decline in the returns of PIBs, regardless of their maturities, in the auctions that were held recently. In other words, the profit returns on NSS are directly related to the rates of PIBs, or let’s just say, the returns on Defense Saving Certificates are dependent on the rates of 10-year PIBs, Regular Certificates are dependent on 5-year PIBs and Special Saving Certificates are dependent on 3-year PIBs.

According to a report by Arif Habib Limited, the yields on PIBs for 3-year, 5-year and 10-year have declined by 190bps, 220bps and 235bps respectively. Similarly, the secondary market yields for the same bonds of the same tenure have declined by 254bps, 262bps, and 256bps respectively.

Since it’s quite evident that there is a strong, direct relationship between the National Saving Certificates and the PIBS, it wouldn’t be hard to guess that the performance of equity market will also be dependent on NSS returns, just like it is on PIB rates.

Quite expectedly, the stock market, KSE-100 index in particular, picked up remarkably after the news of NSS rate slash broke out. The benchmark index, in today’s session, went as high as 35,985, for the first time since June, 2019.

However, as much as we’d like to believe that the stock market will continue its upward momentum because of the aforesaid development, it is not the case, unfortunately. In a rather unexpected twist, the yearly inflation rate for the month of October turned out to be 11.04 percent, as opposed to the market expectations wherein market spectators were expecting the CPI to land within a range of 10.07 percent to 10.50 percent.

Given this unsolicited plot twist, it is highly likely that the rates on PIBs might pick up again. Consequently, it would be hard to deduce whether the stock market will maintain its positive momentum or lose its investors to other lucrative investment opportunities.

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