A wide sell-off was seen at the Pakistan Stock Exchange (PSX) on Monday, with the benchmark KSE-100 Index losing 1,335 points to close at 39,160, down 3.30 per cent.

Trading opened at 40,496 points and the index dropped to 39,177 points within an hour ─ a change of 1,319 points ─ before diving further to a day's low at 39,014. The market opening at 40,496 remained the day's high.

Take a look: Rupee takes another dip

Around 164 million shares worth Rs6.5 billion were traded at the exchange, with 292 of the 344 active scrips declining in value, only 39 advancing and 13 remaining unchanged.

The commercial banking sector dominated trading with 38m shares traded, while chemicals followed with 20m shares traded.

The fall came after the State Bank of Pakistan (SBP) raised key lending rate by 150 basis points (bps) to 10 per cent on Friday and a fall in the value of the rupee on the same day.

The benchmark index has shed more than 3,000 points during the tenure of the current regime. The benchmark KSE-100 Index had closed at 42,447 points when the PTI government came into power.

Analysis

Senior Analyst Naveed Khursheed, currently associated with Topline Securities, held the SBP's decision to raise its policy [target] rate by 150 bps as well as the recent rupee depreciation responsible for the rout.

He said that the SBP had projected real GDP growth for FY19 at slightly above 4pc. He added that it is believed the lower GDP growth projection was based on slower development in various sectors, including cement.

Talking about the sentiment at the capital market, Khursheed said that investors and brokers say they were fearing a situation resembling the 2008 crisis.

Another factor, he said, was the increased interest rate. Based on discussions with investors in the equity market as well as brokers, he said that they were expecting the interest rate to be further increased to 14pc and thus, they are aiming to tap into the fixed income market.

According to investors, their trust in the incumbent government has shaken because it has failed to announce a proper road map for economic stability so far, he said, adding that because of all these setbacks to the investors' confidence, negativity is looming large over the bourse.

According to Khursheed, the market will remain volatile till January 2019, when the ruling government is expected to enter the IMF programme. "Till then, political and economic events will dictate the bourse," he said, adding that any big development on part of the government to restore investors' confidence will change the direction of the market.

Ahsan Mehanti, another analyst, remarked: "The recent hike in policy rate is the main reason behind the market crash."

"The market is under pressure and will remain under pressure in the coming days," he said, adding that the policy announcement was unexpected in the current scenario.

Factors leading to bloodbath

While the government has been pretty comfortable politically, the economy remains in the eye of the storm. The government has had to grapple with fast depleting foreign exchange reserves and ever-widening deficits.

The rupee closed at 139.06 to the dollar in the interbank market on Nov 30 — a depreciation of 3.8pc in its value.

Bankers said the rupee plunge happened as the SBP silently watched the demand for dollars rising on imports and external debt payments. It was so intense and sudden that the dollar surged to Rs144 at one point on Friday before closing lower.

Also on Nov 30, the SBP raised its key policy rate by 150 basis points to contain inflation, a product of several economic factors, most notably a weaker rupee.

Spectators and analysts, however, had expected just a 1pc hike in the policy rate, DawnNewsTV reported, adding that the increase brings the policy rate into double digits amid reports that the move is linked to talks with the International Monetary Fund (IMF) on a bailout package.

The timing of the twin moves suggests Pakistan has finally started fulfilling some pre-conditions of a fresh IMF loan, though Finance Minister Asad Umar has said he is in no hurry to get it. The government does not disagree with the Fund’s concerns on economic fundamentals, bankers and analysts say.

Also, it does not disagree with the Fund’s prescription for curing our ailing economy: let the overvalued rupee find its real market worth, minimise energy subsidies, reduce development and non-development expenses, hike interest rates — and choose economic stability over growth in the process.