Shares at the Pakistan Stock Exchange (PSX) slid on Thursday on fears that the central bank may raise the policy rate, which is already at a 25-year-high of 17 per cent, in an off-cycle review.

The benchmark KSE-100 index lost 329.09 points, or 0.8pc, to close at 40,838.51 points. It reached an intraday low of 395.08 points, or 0.95pc, around 2:50pm.

Intermarket Securities’ Head of Equity Raza Jafri said a sharp increase in yields on yesterday’s treasury bill auction led to concerns of a similar upward move in the benchmark policy rate.

“This is leading to the market not responding as enthusiastically to strong incoming results as it did yesterday,” he noted.

Arif Habib Corporation Director Ahsan Mehanti also agreed that the increase in yields affected the market negatively.

“Stocks were under pressure after government bond yields shot up by 195 basis points to 19.95pc for 3-month T-bills.”

He added that the delay in a staff-level agreement between the International Monetary Fund (IMF) and the government for the release of a desperately needed economic bailout and reports of the rupee’s value plunging against the US dollar in the open market played a catalyst’s role.

The expected increase in the interest rate is based on the rates the government set in the T-bill auction.

The government raised Rs258 billion in the auction on Wednesday. The cut-off rates for the three-month, six-month, and 12-month tenors jumped 195 bps, 206 bps, and 184 bps higher than the previous auction.

Pakistan is undertaking key measures to secure IMF funding, including raising taxes, removing blanket subsidies, and artificial curbs on the exchange rate. While the government expects a deal with IMF soon, reports say that the international lender expects the policy rate to be increased.

The next meeting of the central bank’s Monetary Policy Committee is scheduled for March 16. However, some investors believe that the rate hike is imminent and it could be done as soon as Friday.

Pakistan needs to reach an agreement with the IMF to avoid the risk of default as its foreign exchange reserves deplete to critical levels, barely enough to cover three weeks of controlled imports.

The staff-level agreement would pave the way for the release of $1.2bn from the lender as well as unlock inflows from friendly countries and other multilateral lenders.