Pakistan’s financial landscape is showing signs of easing conditions, with the State Bank of Pakistan’s Monetary Policy Committee (MPC) opting to maintain stability in its recent meeting, while the Pakistan Stock Exchange (PSX) continues to ride a bullish wave.
In its meeting held on September 15, 2025, the MPC decided to keep the policy rate unchanged at 11 percent. The decision reflects a cautious approach, balancing signs of moderating inflation and improving economic indicators against uncertainties linked to ongoing flood-related disruptions. Policymakers are keen to preserve financial stability while assessing the potential economic costs associated with weather-driven shocks.
Between July 1 and August 29 of FY2026, Pakistan’s broad money supply (M2) contracted by 2.3 percent compared with a 2.5 percent contraction in the same period last year. Within M2, Net Foreign Assets registered an increase of Rs. 34.6 billion, while Net Domestic Assets declined sharply by Rs. 990 billion. This contraction largely reflects the government’s fiscal strategy to reduce reliance on central bank borrowing.
The government retired Rs. 2,328.2 billion in budgetary borrowing during the period, compared to a net borrowing of Rs. 733.3 billion last year. Meanwhile, the private sector also retired Rs. 214.8 billion, indicating limited new credit demand amid existing economic conditions. Analysts suggest this trend points to both fiscal consolidation and cautious behavior from the private sector, which remains watchful of evolving domestic and global economic challenges.
On the capital markets side, the Pakistan Stock Exchange delivered one of its strongest monthly performances in recent history. The benchmark KSE-100 Index surged by 9,227 points in August 2025, closing at an all-time high of 148,617 points. This impressive rally reflects investor optimism, supported by moderating inflation, expectations of continued monetary stability, and improving corporate earnings outlook.
Market capitalization also expanded significantly during the month, rising by Rs. 952 billion to reach Rs. 17,655 billion. The sustained bullish sentiment underscores investor confidence in Pakistan’s financial markets, particularly as foreign reserves remain stable and key macroeconomic indicators show signs of resilience.
Analysts note that the PSX’s strong rally is being fueled by both domestic and international investor interest, as Pakistan’s economic fundamentals improve and the prospects of lower borrowing costs in the future remain on the horizon. Sectors including banking, cement, and energy have seen renewed interest from investors, contributing to the overall positive momentum.
The combination of steady monetary policy and a surging stock market signals an environment where financial conditions are easing, even as policymakers remain cautious of external and domestic risks. The unchanged policy rate at 11 percent is seen as a balancing act, allowing inflation trends to be closely monitored while providing the financial sector with a sense of stability.
Looking ahead, the key challenge will be sustaining this equilibrium. While the monetary side reflects stability through controlled inflation and fiscal restraint, the stock market’s rally must be supported by real economic growth to maintain momentum. Market experts caution that any shocks from global commodity prices or further flood-related disruptions could alter the current trend.
Still, with monetary conditions easing and the PSX continuing its bullish performance, Pakistan’s financial system is entering FY2026 with improved confidence and resilience.
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