Rupee strengthens as REER index drops, exports seen rising

KARACHI: Rupee rose to its highest level in one month on Monday as the country’s real effective exchange rate index fell to the lowest since July, signaling an improvement in export competitiveness.

The rupee gained 0.3 percent to close at 295.95 per dollar in the interbank market, extending its rally for the ninth straight session. The currency has appreciated 4 percent since Sept. 4, when it touched a record low of 307.

The rupee had been under pressure ever since the caretaker government assumed office on August 14, 2023, amid concerns that the non-political arrangement may enable the currency to adjust to market forces in accordance with the guidelines of the International Monetary Fund.

As a result, from August 14 to September 4, the rupee plunged by 10 percent (from Rs296 to Rs328) against the dollar in the open market and by 6 percent (from Rs288 to Rs307) against the dollar in the interbank market.

“The forex market now has more liquidity as a result of exporters selling in good volumes in ready and in forwards, as well as from an increase in daily remittances,” said a currency dealer. The real effective exchange rate index, which measures the rupee’s value against a basket of currencies of Pakistan’s major trading partners, declined to 90.1 in August from 91.6 in July.

“This [decrease in REER] suggests that the rupee is undervalued. If it stays at the current level, it will improve Pakistan's export competitiveness,” said Fahad Rauf, the head of research at Ismail Iqbal Securities.

According to a report from Topline Securities, the open and black markets, where the premium (open market versus interbank rate) climbed from 1-2 percent to 6-7 percent, were primarily responsible for the recent surge in the value of the dollar after August 14, 2023.

In light of this development, the caretaker administration and the SBP implemented a number of measures to reduce open market demand. To stop currency smuggling, the measures included increased border security. Abolition of exchange firms engaged in illicit activity. The SBP directives directing category "B" exchange firms and franchisees to either merge with fully functional entities or sell their businesses to stronger counterparts. These actions have caused the rupee to strengthen during the previous nine working days. The rupee has increased by 4 percent in the interbank market, going from Rs307 to Rs296 per dollar. The rupee, meantime, has increased by 10 percent in the open market, going from Rs328 on September 4 to Rs297 as of September 18. “Going forward, in the short run, besides these administrative steps completion of IMF review due in Nov 2023 will be an important driver of local currency,” said Topline Securities.

“Moreover, Global oil prices, dollar inflows from multilateral agencies like World Bank and Asian Development Banks, timely rollover of maturing loans, and expected FDI in few sectors will be other factors determining the value of rupee,” it added.