Pakistan’s monetary and financial landscape presented a mixed picture in July 2025, with monetary indicators reflecting seasonal trends, while the Pakistan Stock Exchange (PSX) sustained strong momentum, reaching record levels. The Monetary Policy Committee (MPC), in its meeting on July 30, 2025, opted to keep the policy rate unchanged at 11 percent. The decision was based on favorable inflation outcomes in June 2025, but the Committee flagged risks of a moderate rise in inflation in the coming months due to energy price adjustments, particularly gas tariffs.
In terms of monetary aggregates, the money supply (M2) registered a seasonal contraction during the first month of FY2026. Between July 1 and August 1, M2 recorded negative growth of 4.9 percent, compared to a contraction of 3.2 percent in the corresponding period last year. This decline was largely influenced by developments in both Net Foreign Assets (NFA) and Net Domestic Assets (NDA) of the banking system.
NFA decreased by Rs. 61.8 billion during this period, though the fall was less pronounced compared to a decline of Rs. 73.4 billion recorded in the same timeframe last year. NDA, however, saw a sharper contraction of Rs. 1,940.7 billion, significantly higher than the Rs. 1,086.0 billion decline reported in the corresponding period of FY2025.
Under government borrowing for budgetary support, a notable shift was observed. The government retired Rs. 450.9 billion in July FY2026, in contrast to fresh borrowing of Rs. 304.2 billion recorded in the same period last year. Similarly, the private sector also demonstrated reduced reliance on borrowing, retiring Rs. 222.4 billion, compared to Rs. 346.7 billion retired during the same period last year. These developments highlight an ongoing correction in liquidity flows and borrowing needs at both public and private levels.
Despite the seasonal contraction in monetary aggregates, the capital market offered a stark contrast by delivering remarkable gains. The Pakistan Stock Exchange (PSX) surged to an all-time high of 150,591 points in the third week of August 2025. The KSE-100 index also posted substantial growth, gaining 13,763 points in July alone and closing the month at 139,390 points.
Market capitalization reflected this bullish sentiment, increasing by Rs. 1,464 billion and settling at Rs. 16,703 billion by the end of July 2025. Analysts attribute this surge to improved investor confidence, expectations of macroeconomic stabilization, and strong corporate earnings across key sectors.
While monetary indicators continue to exhibit seasonal tightening, the stock market’s resilience suggests growing optimism within the investment community. However, the risks highlighted by the MPC—particularly regarding energy prices and their impact on inflation—remain key factors to watch in the months ahead.
The overall picture underscores a dual trend: monetary tightening and liquidity constraints on one hand, and equity market strength on the other. This reflects investor belief in Pakistan’s long-term economic potential despite short-term adjustments in inflation and fiscal balances.
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