KARACHI - State Bank of Pakistan (SBP) has kept the policy rate unchanged at 10 per cent for next two months as against expectation of 50-100 basis points cut on the back of dramatic rupee strengthening against dollar and its impact on dwindling inflation, and growth in GDP.The monetary policy statement said the country’s all major economic indicators have moved towards the desired direction over the past few months including inflation, industrial production, exports, remittances etc.Similarly, the fiscal deficit has been contained during the first half of the fiscal year while the private sector credit has increased. Moreover, reflecting positive sentiments prevailing in the market, the fiscal authority has been able to borrow long term and rupee has appreciated against the US dollar. Above all, the foreign exchange reserves of SBP, a key source of concern for some time, have increased noticeably. Despite these positive developments in headline variables, however, the economy still faces many challenges and a pro-active policy effort is required to continue to maintain the momentum, the central bank statement said. Increase in SBP’s foreign exchange reserves from $3.2 billion at end-January 2014 to $4.6 billion by 7th March 2014 is only a beginning. A substantial and consistent accumulation of reserves is required to reach and maintain an adequate level. Similarly, the net capital and financial flows, $428 million during July – January, FY14, are still considerably lower than the external current account deficit of $2,055 million during the same period. A timely materialization of anticipated foreign inflows during Q4-FY14 is likely to improve the overall external position in the coming months. This expected outcome, however, is contingent upon a host of policy actions including an appropriate monetary policy stance.Concerted structural reforms are required to address the deeper weaknesses in the balance of payments position. Reliance on one-off inflows and foreign loans may provide short-term stability, but share of private financial flows need to increase consistently to achieve long-term stability. Similarly, there is a need to reduce trade deficit by improving efficiency and competitiveness of exports and to lower share of imported oil in meeting domestic energy needs. Nevertheless, increase in SBP’s foreign exchange reserves has improved market sentiments, dispirited speculators and resulted in an appreciation of rupee viz-a-viz US dollar by 6 percent since the last monetary policy announcement on 17th January 2014. This is broadly in line with SBP’s earlier assessment that pickup in economic activity is more likely to be a reflection of increased utilization of idle productive capacity rather than a marginal increase in aggregate demand. Reducing fiscal borrowings from the SBP would also be critical in keeping the growth in Net Domestic Asset (NDA) of SBP within the agreed targets. In this vein, timely materialization of anticipated foreign inflows is an important factor. Not only will it help in the accumulation of foreign exchange reserves but also in keeping key monetary aggregates on a desired path.