Rupee to navigate narrow range before growth-driven volatility

KARACHI: The rupee is expected to remain stable within a narrow range until the end of June, but , the currency is anticipated to face downward pressure in the following fiscal year as the newly-formed government focuses on growth initiatives, analysts said on Saturday.

The rupee remains stable and is trading at 278 to the dollar in the interbank market, and analysts predict some pressure on the currency after June when the government will try to spur growth after achieving some stability, which will require an increase in imports and a rise in demand for dollars.

Tresmark, in a weekly note, predicted that the rupee will remain range-bound until the end of June and that the new fiscal year could put some pressure on the local currency due to a number of factors.

“June end is typically the month of heavy outflows, and after attaining some stability, the government (and the IMF) will want to boost growth for which imports will have to grow, increasing demand for dollars,” Tresmark said.

“By June end, we expect the REER [real effective exchange rate] to be around 110 and therefore some depreciation of the rupee will be in order,” it added. “Although there will be some pressure on the rupee, we expect the rupee to trade around 285/dollar for the July-September quarter. The wild card in this is oil prices.”

Everything worked to the rupee's advantage this week, making it an ideal one. The International Monetary Fund reached a staff-level agreement with Pakistan on the second and final review of a $3 billion standby arrangement, which, if approved by its board, will see the global lender release $1.1 billion for the country’s cash-strapped economy in April.

Pakistan seeks a fresh, larger, and longer bailout from the IMF, and according to reports, the government will negotiate an extended fund facility with the IMF in Washington next month. Islamabad plans to ask for a loan of at least $8 billion.

In February, the country's current account (CA) showed a $128 million surplus as opposed to a $303 million deficit in January. The current account surplus exceeded market estimates by a significant amount.

Due to the CA surplus, the economic team lowered its annual CAD from $6 billion to $2 billion and projected a foreign financing gap of $11 billion versus earlier estimates of $17.6 billion, according to Tresmark.

The country’s foreign exchange reserves held by the central bank rose by $105 million to $8.018 billion as of March 15. The State Bank of Pakistan kept its key interest rate unchanged at a record 22 percent for the sixth consecutive time.

The REER increased to 102.2 in February, and it was much less than market expectations of around 105. Pakistan’s foreign direct investment turned positive in February. Pakistan’s sovereign bonds rallied on news of the successful IMF review, and Pakistan is all set to offer $300 million in Panda bonds.

Surprisingly, the rupee did not strengthen more given all the positives this week.

“...traders pointed out that if the central bank was not mopping up liquidity (buying dollars) the rupee would have risen to below 275 per dollar for sure,” Tresmark said.

The rupee ended the week at 278.13 against the dollar, down from its Monday closing value of 278.63. Throughout this week's five sessions, the rupee appreciated by 0.17 percent.