KARACHI, The rupee is expected to hold steady in the near term, as a stable currency is needed to curb imported inflation and boost business confidence and foreign investment, analysts said on Saturday.
The rupee saw slight gains versus the dollar this week in the interbank foreign exchange market. On Monday, the rupee finished at 279.85 against the dollar, and on Friday, it closed at 279.59.
"The component of imported inflation rises when the value of the rupee declines, said Tresmark, a financial terminal in a weekly note. "A policy of steady to stronger local currency has been adopted to prevent this."
It should be clear by now that inflation is the nation's biggest party spoiler. Not only does it not go away, but every other policy aims to normalise it instead. Most economies prioritise inflation over economic growth, which is a global issue.
In 2023, Pakistan saw its highest-ever inflation, and its currency fell to all-time lows until a $3 billion International Monetary Fund bailout package saved the country from an imminent sovereign default in July.
The country’s consumer price index inflation increased to 29.7 percent in December from 29.2 percent in November.
“The rupee/dollar parity was 286 at the beginning of the fiscal year. A yearly depreciation of 7–10 percent is typical, based on historical trends, supporting exporters and keeping the real effective exchange rate close to par,” Tresmark said.
“This would imply that June-end closing rates would be around 310/$. As of today, rupee is actually stronger by around 2 percent, and depreciation looks unlikely,” it added.
“The new incoming government is unlikely to rock the boat unless inflation cools down significantly. Consequently, the rupee is headed towards a soft close by June 24 end.”
Exporters, which are now fiercely competing with global manufacturers and also domestic conditions like escalating cotton prices, energy, and labour costs are taking the extraordinary risk of selling dollars in forward to hedge their sales and give competitive prices.
There also seems to be a concerted effort to keep swap premiums high amidst declining interest rates to support forward selling, Tresmark noted.
The central bank’s aggregate swap positions have reduced to $3.2 billion from $4.5 billion in June 2023.
The stable currency has prompted higher trading numbers, business confidence, a robust stock exchange, and an inflow of portfolio investment. Month-to-day inflows are around $46 million with about $19 million coming through the purchase of market treasury bills by foreign investors, it added.
In a poll conducted by Tresmark, 83 percent of participants did not expect any rate change in the upcoming monetary policy review meeting on Monday. The majority think there will not be any rate cut for another two months. While the SBP has projected inflation to come down drastically, revisions in energy and fuel prices will keep inflation at elevated levels.