Foreigners retreat from T-bills in March on low returns

KARACHI: Overseas investors withdrew a net $135.5 million from treasury bills as of March 14, as a significant decline in interest rates and the early signs of the rupee’s depreciation dampened appetite.

Foreigners invested $16.636 million in T-bills but pulled $152.108 million from them, data from the State Bank of Pakistan (SBP) showed on Friday. Investors bought $1.163 billion worth of T-bills between July 1, 2024 and March 14, 2025, and sold $1.121 billion, resulting in a net inflow of $42 million.

Saad Hanif, head of research at Ismail Iqbal Securities, said the significant outflow of $156.1 million in December 2024, followed by continued net selling of $48.9 million in January 2025 and a further $135.5 million outflow till mid-March 2025, indicates a sustained shift in foreign investor sentiment after several months of sizable inflows in the first half of 2024.

“This extended reversal likely reflects profit-taking behaviour by foreign investors who accumulated positions during peak inflows -- most notably $229.6 million in May 2024. Contributing factors may include the sharp 10ppt [percentage points] decline in interest rates, which has reduced the relative appeal of T-bills, as well as the early signs of rupee depreciation, prompting a risk-off approach from investors seeking to preserve returns,” Hanif added.

While there was a brief rebound in February 2025 with $46.9 million in inflows, the renewed outflow in March suggests sentiment remains cautious, he added. “Looking ahead, investor flows will likely hinge on the trajectory of the Pakistani rupee, expectations around interest rates, and broader macroeconomic stability. Any resurgence in carry trade flows will depend on a more favourable risk-return profile relative to regional peers,” he said.

The SBP halted its easing cycle last month, maintaining the benchmark policy rate at 12 per cent due to concerns about inflation risks linked to volatile food prices and rising global tariffs. Since June 2024, the central bank has cut its key interest rate by 1,000 basis points (bps). Inflation in Pakistan is trending downward, with authorities attributing this decrease to economic stabilization achieved under the International Monetary Fund (IMF) loan programme. In March, the consumer price index inflation slowed to 0.69 per cent, marking its lowest rate in more than seven years.

However, core inflation remains persistent. There are growing pressures on the external account, as the SBP’s foreign exchange reserves have fallen below $11 billion, reaching $10.68 billion during the week ending March 28 due to external debt repayments. Furthermore, the rupee has been experiencing slight depreciation since January.

Analysts and market participants expect interest rates to remain unchanged, with any potential rate cuts likely occurring in the latter half of 2025. Later last month, the IMF reached a staff-level agreement with Pakistan for the first review of the ongoing $7 billion loan programme. The global lender also agreed to a new arrangement under the Resilience and Sustainability Facility (RSF). Islamabad is expected to receive $2.3 billion in two separate loans: approximately $1 billion as the second instalment of the Extended Fund Facility (EFF) secured last year and $1.3 billion under the RSF, pending approval by the IMF’s executive board.