Rupee to stay steady as IMF eases pressure, swap market booms

KARACHI: The rupee is set to trade in a narrow band in the coming weeks, as ample dollar supply from exporters and remittances offsets any potential pressure from political uncertainty and religious travel.

This week, the rupee saw little movement in the interbank market. Monday saw it close at 279.35 to the dollar, but it barely moved and dropped to 279.59 on Tuesday. On Friday, the local unit finished at 279.36.

The rupee seems to be range-bound through the end of March and possibly even beyond, according to Tresmark's weekly note to clients. Political uncertainty might fuel dollar demand and small investor hoarding.

The real effective exchange rate (REER) index appreciated to 101.7 in January, compared with 98.8 in the previous month. For two days, the rupee experienced a slight drop in value due to the rise in REER.

“The key reason for this was that, while the IMF may be silent on the rupee appreciating, if it considers the Rupee overvalued (on the REER index) it might demand devaluation,” the report said.

But the rupee recovered after two days as traders factored in that even in that case the IMF would not demand a steep devaluation and would be indifferent as long as REER stays near the 100 mark, it added.

With short-term swap rates hovering around the 18 percent annualised mark, the swap market has experienced an extraordinary boom. The premium for two weeks, one, and three months is 185, 390, and 940 paisa respectively.

“These premiums are too attractive to exporters who can add a risk-free 3-4 percent into their profit margins. This factor is not being overlooked by them as we saw exporters sell forward contracts yesterday mostly in the one and two-month tenors,” it said.

“With premiums on the rise, it is evident that dollar liquidity in the market is ample with banks’ nostro accounts sufficiently funded,” it noted.

Within the next two weeks, the report sees an increase in remittances. This will further improve dollar liquidity levels. However, demand for dollars for Umrah will also go up, it said.

The rupee fell from 176/$ to 308/$, or a 75 percent devaluation in just 18 months, marking the beginning of the great depreciation, according to the report. After the caretaker government took office in September 2023, the local unit began to recover. The rupee has stayed in the 279/280 range for the past 30 days.

According to the Tresmark report's findings, the depreciation of the rupee caused a 15 percent decline in exports during FY22–2023. It has increased marginally from the pre-depreciation period. Imports decreased sharply by almost 28 percent. However, not the entire decline was attributable to devaluation; rather, the central bank's administrative measures were largely to blame.

Remittances dropped substantially, as people started to send money through alternative channels. It is now almost back to the pre-depreciation era.

The biggest negative impact of the rupee depreciation was the financial and economic stress and panic. The parallel markets for dollars erupted and everyone was fixated on securing dollars to hedge their wealth and savings. Many businesses shifted their operational headquarters abroad. Interest rates had to be jacked up to make rupee holdings attractive, but people had lost faith in the local currency.

It is evident that the depreciation of the rupee brought little to no positives, but a host of challenges that bordered on full-blown economic crises. “With these lessons (hopefully) learnt, any new government will try to keep the currency stable for as long as they can. It was also endearing to see that the IMF did not demand depreciation and saw the good in a stable currency,” said the report.