Rupee to test 277 level on dollar inflows, IMF optimism

KARACHI: The rupee is expected to strengthen further and trade below 280 per dollar in the coming weeks, supported by exporters’ sales of the greenback and hopes of a further boost in foreign exchange reserves from external partners, dealers and analysts said on Saturday.

Positive sentiments prevailed ahead of the International Monetary Fund’s (IMF) board meeting on Jan 11, when the global lender is expected to approve the next $700 million tranche from its current loan programme for Pakistan.

“In the weeks ahead, we anticipate that the rupee will continue to appreciate somewhat versus the US dollar and trade below the 280 mark,” said a currency dealer.

The rupee saw modest advances in the interbank market this week. The rupee closed Tuesday at 281.89 to the dollar, but strong economic data and dollar selling by exporters helped it finish at 281.40 on Friday.

The currency market was closed on Monday on account of a bank holiday.

Many factors point to a stronger rupee this month, according to a note from analysts at the financial terminal Tresmark on Saturday.

“The biggest clue is the mystery inflow in reserves,” the note said.

The fact that the reserves rose by over $1 billion in the previous two weeks may not be as important as the source of these inflows, it added.

“The inflow from untold sources indicates that Pakistan is still relevant in the global power lane. It also almost ensures that the IMF’s board will approve the upcoming tranche. And lastly, it also erodes the potential repercussions of whether elections will happen on time or not.”

Pakistan’s foreign exchange reserves held by the State Bank of Pakistan jumped to $8.221 billion as of December 29.

Anticipation is growing for the next IMF tranche after its board meeting, which will substantially boost the reserves.

It is expected that multilateral inflows will accelerate and increase in size following IMF approval.

“Trade deficit has narrowed to $1.7 billion, thereby raising expectations of another month of current account surplus. In addition to this, there is more inflow in SCRA [special convertible rupee account] related to PSX, indicating better liquidity levels,” said the Tresmark note.

“Pakistan’s major fight is against inflation. A stronger rupee keeps price hike expectations checked.

The government will want to continue this policy,” it added.

Secondary market bond yields have declined, indicating potential interest rate cuts by March 2024 amidst expectations that inflation will come down.

The note expects if inflation trends lower in January, the real effective exchange rate will be more or less contained.

Pakistan’s credit default swap is consolidating to pre-crisis levels and Euro bonds have rallied. This will also support the local unit.

“Last week, we saw increased activity by Exporters to sell dollars forward, mostly within the 60-day window, indicating the markets' view of Rupee stabilisation. Lastly, Fed’s indication of cutting rates has mitigated liquidity & funding concerns of Emerging Markets,” it said.

“The one big risk to Rupee is the increasingly turbulent Gaza conflict. Israel has suddenly raised the geopolitical stakes in the Middle East by the targeted assassination of Hamas's de facto ambassador to Hezbollah, followed by twin suicide attacks on the funeral. Taking turns, Iran has now vowed to take revenge” it added.

“Exporter concerns will cap the rupee rally. We see the rupee to test its highs of 277/$ before the end of this month.”

The rupee was one of the three best-performing currencies in Asia. According to data from Topline Securities, the rupee increased by 0.1 percent against the US dollar this week and by 1.8 percent against the US dollar so far this fiscal year. This week, the Indian rupee gained 0.1 percent while the Sri Lankan rupee gained 0.5 percent against the US dollar.