LAHORE (PPI) - Despite rising commodity prices, Pakistan posted a current account surplus of $26 million in first half of the fiscal year 2011, compared to a deficit of $2.57 billion last year. Experts said that this, plus the extension in IMFs SBA programme for another nine months has helped ease the markets concerns over macro vulnerabilities in the immediate term, reflective from the stability of rupee dollar parity and the ongoing equity market rally (up 12.7 percent since December 1st 2010). They said that This gives birth to a series of questions; if the said market rally is justified in the back drop of expectations of further tightening of the monetary policy? Whether the high fiscal risk emanating from the governments decisions to withdraw the hike in petroleum prices, cap electricity tariff till June 30th and delay implementation of the RGST is already priced in? And finally, whether the balance of payments risk is considered to be manageable, especially when the IMF repayments too begin July 2011 onwards (including one of US$500mn in lieu of the flood disaster and US$1.4bn lent for budgetary support)? In our view, the investors appear to have ignored all these, focusing instead on higher corporate profitability, healthy pay-outs and the KSE-100 index anomaly where OGDC, PPL, MCB, NESTLE, HBL and NBP combined make up 49.7 percent of the Index. Therefore, we rule out any meltdown in the Index and expect it to continue hovering around 12,500-13,000 levels, despite the macro situation discussed above. Contrary to policy rate expectations for the last three reviews, based on a stable balance of payment position and higher external support, the central bank raised the DR each time. Experts continue to support the need for fiscal tightening over monetary, as the latter has proven to be futile in offsetting the high government borrowing thus far. Secondly, inflation has been a product of massive floods in the country and higher global commodity prices; therefore, it is impossible to tame food & fuel inflation through monetary tightening. In the first 6 months of FY11, perishable foods inflation was recorded at 38.5 percent YoY. In fact, tightening has crowded out private sector borrowing and constantly compounded the threat of lower GDP and tax revenue growth. Analysts expectation: given, 1) the contained balance of payments, 2) delay in the IMF review till August 2011 and 3) the transmission effect of the last three DR hikes not yet visible, we believe, the SBP will defer the decision of a hike in the January review and keep the policy rate intact at 14.0 percent. In the auction calendar for 3QFY11, the SBP has announced the intent to offload Rs980bn worth T-bills compared to anticipated inflows of Rs889bn. As a result of higher T-bill auction targets combined with surging demand for private credit, the inter bank market is expecting tight liquidity conditions ahead. This is also evident from the last T-bill auction following which, yields were up 18bps to 13.43 percent for the 3-month tender. We continue to expect the market to take bets on the short-end of the yield curve and avoid taking interest in the long-end paper, until the fiscal position is clear.