Rupee seen extending gains on strong fundamentals

KARACHI: The rupee is likely to maintain its upward momentum against the U.S. dollar in the coming week, supported by robust export and remittance inflows and positive sentiment on the country’s economic outlook.

The rupee closed at 295.95 per dollar on Monday in the interbank market, but it gained strength and finished at 291.76 on Friday. In the five sessions this week, the currency increased against the dollar by 1.41 percent.

“Although we anticipate that the rupee's rising trend will continue, we do not anticipate a significant increase in its value relative to the dollar,” said a currency dealer.

“The campaign against illegal dollar transactions, currency hoarders, and black marketers appeared to be making some progress. The forex market now has more liquidity as a result of exporters selling dollars as well as an increase in daily remittances,” the dealer added.

In an effort to promote remittances through legal channels, the State Bank of Pakistan announced monetary incentives for banks, and these actions contributed to support the rupee's sentiment. Foreign exchange reserves held by the central bank also slightly increased. In the week ending September 15, the SBP's forex reserves rose by $56 million to $7.7 billion.

Despite the difficulties caused by rising oil costs, there is hope that inflation may moderate in the months to come. The stability of the currency, improved reserves, crackdowns on smuggling, and a drop in the cost of basic commodities like wheat and sugar are some of the variables that contribute to this optimistic view. Concerns over an extended postponement have been allayed by the Election Commission's recent declaration that the elections are slated for the final week of January 2024. Investors have expressed relief over this news, which has caused a spike in positive sentiment.

“The market expects the Rupee to consolidate in the 290-295 range with a possible outrun towards the July levels of 286/$,” said Tresmark in a weekly client note on Saturday.

“The outside factor in this delicate equation is the political stability/election schedules. This factor was in the limelight when PSX Index, in spite of 'no rate hike’, stronger Rupee & higher forex reserves, remained broadly sideways,” it added.

Pakistan is also expecting remittances to clock in at around $2.5 billion primarily due to a crackdown on the grey market and additional incentives to remitters. This, along with higher exports in September will keep forex liquidity ample in the market. However, the backlogs of imports are still only partially depleted and the remainder will keep demand high, it said.

Despite the administrative steps showing results in the correction of the rupee, sugar, wheat, and cooking oil, analysts do not expect a significant reduction in the severe inflation Pakistanis are currently experiencing, according to Tresmark.

This is largely a result of rising petrol and energy prices. While most analysts expect consumer price index inflation for September to remain around the 30 percent mark, the weekly sensitive price index has experienced three weeks of consecutive gains, which threatens to change SBP's inflation prognosis.

“While inflation puts pressure on the host country’s local currency, Pakistan could stand to gain if it prudently appreciates it currency in what is being called "reverse currency war” to combat debilitating inflation, in addition to administrative measures and tight monetary stance,” it said.

“At the same time, it will need to keep an eye on REER [real effective exchange rate] which has gained 6 percent in the last 6 months (from 85.6 March to 90.12 August), however, as per our most recent workings, it is estimated to end September around the 87 mark.”