Pakistan’s central bank held its policy rate at 22 percent for a full year from mid-2023, a level that made rupee assets unusually high-yielding on paper. The State Bank then began cutting in June 2024 and kept going, bringing the rate down to 11 percent by May 2025 as inflation fell from the high twenties into low single digits. The change significantly altered the logic of currency positioning in a relatively short time.
Carry is the simplest way to see the change. A classic carry position borrows in a low-yielding currency and holds a high-yielding one, collecting the interest gap as long as the exchange rate and transaction costs do not wipe it out. At the peak, the gap between Pakistan’s policy rate and US short-term interest rates exceeded 15 percentage points. By the time the cutting cycle matured, that cushion had narrowed considerably, leaving less room for rupee depreciation before an FX trade built on the differential would lose its appeal. Real rates complicated the picture. Because inflation fell faster than the policy rate, Pakistan’s approximate inflation-adjusted interest rate actually rose sharply during parts of the easing cycle. Foreign portfolio investment in Pakistani treasury bills also increased during parts of 2024, though the amounts remained modest.
Forward pricing carried the message to businesses as well. In a market where the rupee forward premium is influenced by the interest rate gap, falling Pakistani rates could mean cheaper hedging for importers locking in dollar purchases months ahead. Corporate treasurers who had avoided forwards when premiums were punitive could find the cost of protection more reasonable, while exporters selling dollars forward could receive less from the premium than before. Such changes in hedging behavior could also influence demand patterns in the interbank market.
History tempers any enthusiasm about carry in the rupee. The currency lost roughly a third of its dollar value between early 2022 and late 2023, a slide large enough to erase substantial interest earnings. Investors with long memories may view the yield as compensation for exactly that kind of event, and a narrower spread offers less protection against another balance of payments squeeze. The relative stability of the rupee through 2025, alongside reserve accumulation and continued IMF support, has not removed those concerns.
Retail access looks very different from institutional access. Offshore platforms do not widely offer USD/PKR, and where they do, overnight swap charges and wide spreads can absorb much of the theoretical carry. Overseas Pakistanis investing in Naya Pakistan Certificates through Roshan Digital Accounts have a more direct route to rupee yields, yet the appeal of these investments still depends on the certificate rates, currency denomination, and returns available from dollar instruments abroad.
Anyone weighing an FX trade in the rupee faces a calculation involving interest income and exchange rate risk. Lower nominal rates have made the carry thinner, while stronger reserves may provide some protection against external pressure, although that balance can change if oil prices rise sharply or external financing tightens. The smaller interest differential leaves less room for exchange rate losses.
