Karachi: The KSE-100 Index saw a significant rise of 7.5% in May, driven by a robust defense response to regional tensions and positive economic developments. The market initially dipped by 7% early in the month due to heightened tensions between India and Pakistan. However, a subsequent ceasefire and international acknowledgment of Pakistan's strategic defense efforts spurred a strong recovery, resulting in a 13% gain.

Further bolstering market confidence, the International Monetary Fund disbursed a US$1 billion tranche under the Extended Fund Facility, acknowledging Pakistan's policy measures. Additionally, the IMF approved a US$1.4 billion Resilience and Sustainability Facility. These actions were accompanied by a positive progress report on Pakistan's economic stabilization efforts.

In another supportive move for the economy, the State Bank of Pakistan reduced the policy rate by 100 basis points to 11% during its May meeting, responding to a sustained decrease in inflation. Consumer Price Index inflation dropped to 0.3% in April, significantly lowering the average inflation for the fiscal year to date.

Looking forward, inflation is forecast to rise slightly to 2.7% in May, with an average of 4.6% anticipated for the fiscal year. Nonetheless, inflation is expected to remain manageable in FY26, with the IMF predicting a rate of 7.7%. This scenario could lead to further policy rate reductions in future meetings.

The market's focus is likely to shift toward the FY26 Budget announcement on June 10. Budgetary measures are expected to influence market sentiment, particularly in the construction sector, while potential tax changes could impact the auto and food industries.