Rupee likely to be range-bound ahead of IMF’s board meeting next week

KARACHI: The rupee is expected to trade in a narrow range as investors await the approval of a $7 billion loan programme for Pakistan by the International Monetary Fund’s executive board next week, a report said.

The IMF’s board will meet on September 25 to discuss a new 37-month loan agreed in July with Pakistan. This new Extended Fund Facility arrangement that will be subject to board approval follows the successful implementation of the 2023 nine-month standby arrangement, according to the IMF.

In the interbank market this week, the rupee continues to gain some ground versus the dollar. The local currency finished at 278.12 per dollar on Monday, but on Friday it closed at 277.83 after a minor gain was observed. “With the IMF deal still on the ropes, traders and exporters are slow on selling dollars forward. This situation has been further exasperated by a sharp decline in forward premiums,” said Tresmark in a client note on Saturday.

“However, we expect activity to pick up as the IMF date gets closer,” it added. “The market is expecting the rupee to remain range-bound. Reserves are going up, remittances are having an outstanding performance, real effective exchange rate (REER) is on the decline -- and the market is comfortable with the surplus dollar liquidity in the system, which will only get better with the fresh IMF engagement.”

Pakistan’s foreign exchange reserves held by the central bank increased by $43 million to $9.51 billion as of September 13. Remittances increased to $2.9 billion in August, up 40 per cent from a year earlier. These inflows rose by 44 per cent to $5.9 billion in July-August FY25. However, remittances fell by 2.0 per cent on a month-on-month basis in August.

According to the report, projections were made last week that the rupee would trade at approximately 282 per dollar by the end of 2024 and that interest rates would decrease to 14 per cent. It also predicted that oil would fall to levels below $60 within the next six to 12 months.

All of these projections, though, come with a great deal of risk, and recent events have made it even more crucial to take these risks very seriously. There is an increasing geopolitical risk. There is now a very serious chance that Israel and Hezbollah will go to war in Lebanon. As the Israel Defence Forces move their top combat divisions back to the northern border, the likelihood of a regional conflict breaking out is only a matter of time. The Russia-Ukraine war is getting increasingly scary. It will have a direct impact on safe-haven flows and be bullish for gold and oil, among other things.

A jumbo 50 bps rate cut underlines how the Fed has been consistently behind the curve. Markets are now forecasting a 25bps rate cut in November and also in December. With this, the USD Index fell to its lowest this year going below the 100 level at one point, according to Tesmark’s report. Global growth is expected to fall to 2.9 per cent due to weak performance in key economies.

US elections may also significantly alter global economic and trade policies. “With this, chances of Pakistan’s GDP growth to exceed the expected 3.5 per cent are very low. This, along with severe structural issues, unstable political environment and adverse agricultural output will keep the general population under duress,” it said. “Pakistan’s long-term interest rates also dropped significantly with 10-year paper trading at 12.87 from 12.1 per cent a week earlier. A rejected T-bill auction and some verbal intervention helped expectations of faster declining rates.”