KARACHI: Rupee is expected to trade within existing range next week amid matching dollar demand and supply, while central bank’s monetary stance will also factor in, analysts said.
The rupee saw highly volatile moves this week, and hit an all-time low of 169.12 on Wednesday. The central bank’s dollar selling interventions helped arrest rupee’s plunge, allowing the local unit to recover. The verbal intervention by the central bank also stopped speculative trades. The rupee closed at 168.19 to the dollar on Friday.
“We see rupee stable in the days ahead, despite rising economic uncertainty. The match in the demand and supply of the greenback and decline in the real effective exchange rate (REER) could stabilise rupee,” a foreign exchange trader at a commercial bank said.
Analysts said the 169 per dollar level was not unprecedented, the speed at which it got there in spite of having record reserves, left everyone flustered, escalating uncertainty and bringing in self-doubt. Lack of intervention, would have let that situation worsen with increased dollarisation, hoarding and scaling back business initiatives, they added.
The $1.5 billion current account deficit in August was amongst the highest recorded months. Markets are also seeing a sharp exodus of foreign currency from the equity markets ($80 million in the first 17 days of September.
“The rupee seems comfortable viz-aviz REER clocking in 97.38 in August this shows rupee is undervalued by about 3-4 rupees,” said an analyst in a report issued from Tresmark.
“While Rupee is likely to stabilise around the 168.50 figure for a few weeks, the Afghanistan-Pakistan situation will take center stage going forward with regards to rupee direction, as other indicators (reserves, CAD, remittances) could throw the local currency a couple of rupees here and there, but not be responsible for creating a fresh trend,” he said.
The currency market in Pakistan lacks the depth and volume of a mature market. When avenues of fresh money are few and players are less, the age old quote of 'supply & demand' becomes redundant, as there are no new buyers or sellers when prices get distorted. Therefore, the only way to bring equilibrium is when the central bank steps in to remove the excess supply or demand. Neither the number of market makers nor the infrastructure is there in the Pakistan market to make the market-based trading system workable without recourse. When the currency devalues, it contributes to imported inflation. This, in addition to existing structural inflation, increases the pressure to hike interest rates. When interest rates are increased, it not only increases the cost of doing business but, since the government is the biggest borrower, it also increases the financing cost and negatively impacts the fiscal deficit, and again exerts pressure on the local currency. A vicious cycle is thus created.
As one senior trader said, “we need a strong anchor from the SBP, which works as forward guidance.” In the opinion of some market players, the central bank should also have intervened when dollar went below 155 (pre-Covid levels).
About the Afghanistan factor, the report said the burden Pakistan qwould have to shoulder due to this development was to the tune of $500-700 million per month.