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National Savings Schemes rate cut yet another stock market booster

KARACHI (January 06 2003) : The rate cut on National Savings Schemes by 160 to 200 basis points is likely to provide another booster to the stock market which has already gained 112 percent in 2002, emerging best performing bourses in the world.

An analyst said that reduction in rates on NSS is likely to benefit the KSE in terms of improved flow of funds.

The KSE has already gained nearly 450 points, or 18 percent, after cut in the discount rate was made on November 16, 2002, reducing it by 1.5 percent to 7.5 percent – a record fifth revision since July 1, 2001 when the rate was 14 percent.

Asif Ali Quershi, head of research of Elixir Securities, said that the reduction would diminish the relative attractiveness of NSS and would see more individuals' funds flowing into alternative instruments including the capital markets. Given a huge size of NSS, a change in investors' preference for NSS could profoundly affect the capital markets.

He said that reports indicate that Rs 80 billion NSS maturities will be due in February and March 2003.

Increased domestic liquidity shall benefit both the already growing bond market and the stock market, which is still offering better after-tax returns.

With NSS becoming taxable, the stock market becomes even more attractive on tax-adjusted basis with stocks like Fauji, Unilever, PTCL still offering sustainable double-digit dividend yields.

He said that growth in the bond market has coincided with NSS reforms and the latest rate cut would further increase the market appetite for term finance certificates (TFCs).

A leading analyst said that rate cut was very much on the cards since the recent decline in the interest rates on various instruments.

“We are of the opinion that the informational impact will be there and retail investors in particular and institutional investors in general would be re-entering the market on the back of this development,” he said.

The analyst appreciated the government's initiative of removing relative subsidies within the system whereby it wants to see both retail investors and institutional investors at the same footing.

But this rate cut will hurt the already lower saving rates.

Though the government has also announced to come up with a concessionary scheme where it will be offering better returns to the pension holders, but international financial institutions would be expected to raise objections.

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