Monetary Policy

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ASSINGMENT

Submitted to Sir. Ovais Farooqui
Course Finicial Management

1. IMPACT OF MONETARY POLICY IN PAKISTAN ON CURRENT ECONOMIC SCENARIO

The economy seems to have settled at an unenviable equilibrium of high inflation and low growth. The protracted energy crisis and weak fiscal fundamentals are the main reasons behind this outcome. The pace of increase in domestic debt is also considerable and uncertain global economic conditions do not inspire much confidence either. In this constrained environment the impact of monetary policy has become limited; whether it is in terms of direct effects of interest rate changes or broad influence on expectations in the economy.

The average CPI inflation for FY12, 11 percent, was well within the target of 12 percent for the year and on the lower side of SBP’s earlier projections. The main reason for this moderation in inflation is a collapse in real private investment, indicating a structurally weak economy.

More recently, the year-on-year inflation has declined to 9.6 percent in July 2012 from 12.3 percent in May 2012. An unanticipated fall in international oil prices in May and June and a huge reduction of 50 percent in the administered prices of gas in early July 2012 are mainly responsible for this deceleration.

The effects of the latter may also only have transitory effects for a few months. Nevertheless, the decline in inflation in July 2012 has created strong market expectations for a downward revision in SBP’s policy rate. There has been a noticeable reduction in yields on the government securities in secondary market and KIBOR. In any case, it would be too early to call it an emerging trend as there are still deep-rooted factors driving inflation. Stickiness in both the core inflation measures points towards the persistence of inflation in low double digits. SBP projects average CPI inflation for FY13 to remain in the range of 10 to 11 percent, which is higher than the announced target of 9.5 percent for FY13. However, much would depend on fiscal restraint on borrowings from SBP, realization of estimated foreign financial inflows, and improvement in energy shortages to increase the utilization of installed capacity.

Two factors are particularly important – inflation outlook has improved with a projection of 10.5 percent for FY13 and loans to private sector businesses have sharply decreased. This has led to an increase in real interest rates. In taking the monetary policy decision, the Central Board of Directors of SBP has decided to give a relatively higher weight to the state of private sector credit and investment in the economy, knowing that the projected inflation for FY13 could remain slightly higher than the target. Thus, the policy rate is being lowered by 150 basis points to 10.5 percent with effect from 13th August 2012.

2. IN PAKISTAN WHO INVOLVED IN FINANCIAL PRIMARY & SECONDARY MARKET Financial market is a place for buying and selling of financial securities such as stocks and bonds. It facilitates: * The raising of capital (in the capital markets)

* The transfer of risk (in the derivatives markets
* In matching those who want capital to those who have it. Financial Market in Pakistan consists of
(i) Money Market which provides short term funds
(ii) (ii) Capital Market which makes long terms funds available to businesses and industries. The Financial market can be reclassified into Primary Market in which new shares or bonds are issued and (Secondary Market in which securities previously issued are traded such as Shares, Bonds, Commercial Papers, Options and Mutual Fund. Of this, the banking sectors and non-banking sectors are regulated by the central bank, State Bank of Pakistan. While rest of the market (lease, stock exchanges, modarba, mutual funds and insurance) is regulaled by Secruities and Exchange Commission of Pakistan.

3. PAKISTAN STOCK EXCHANGE AND ITS FUNCTIONS

A stock...
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