Rupee to remain stable next week

KARACHI: The rupee is expected to remain stable against the dollar next week, driven by healthy supplies from increased foreign exchange reserves and remittances, dealers said.

The rupee ended Monday’s interbank trading session at 277.85 to the US dollar. On Wednesday, it lost momentum and closed at 278.04. On Friday, though, the local unit returned from its losses and closed at 277.75.

“Next week, we anticipate that the rupee will continue to trade within its current ranges because the market’s sufficient dollar liquidity, bolstered by a steady increase in foreign exchange reserves and stronger remittances, appears to be meeting importer demand,” said a currency dealer.

Pakistan’s foreign exchange reserves held by the central bank rose by $29 million to $11.29 billion as of November 15.

The current account balance recorded a surplus for the third consecutive month in October. Pakistan posted a current account surplus of $349 million in October, bringing the cumulative surplus from July to October to $218 million.

Remittances to Pakistan surged by 23.9 per cent year-on-year to $3.1 billion in October. These inflows rose to $11.8 billion in the first four months of the current fiscal year, up 34.7 per cent from the same period last year.

According to Tresmark’s weekly report, many traders are thinking about how to trade the rupee against the dollar as the year-end draws near. The methods for figuring out the rupee’s fair value are examined in the report. Although there are many variables, it concentrates on the four approaches. The real effective exchange rate (REER) for October is 100.9, implying that the rupee is near its fair trade value based on external competitiveness, aligning with trade fundamentals rather than significant overvaluation or undervaluation, said the report.

“If the goal is to stabilise the REER around 98, the rupee target would be around 285 per dollar,” it added.

Inflation-Adjusted PPP

Using the inflation-adjusted purchasing power parity approach, the rupee’s implied fair value is 260/$, suggesting it would be 6.0 per cent undervalued relative to its inflation-adjusted fair value, according to the report.

While not a model, market sentiment and risk perception exert massive influence on market rates.

“Fortunately for Pakistan, market sentiment has improved over the last few months due to the IMF programme, surplus current account, reserves building, improved ratings, and stable trading conditions. However, political sentiment remains unchanged, and the geopolitical situation has worsened,” it said.

The open market saw some uptick in demand, especially in the northern markets. This was attributed to the upcoming PTI protests and retail investors looking to buy gold during the dip.

Regarding interbank market conditions, the report pointed out that the rupee remained mostly range-bound despite last week’s significant oil payments and the gradual outflow from the special convertible rupee account in Treasury Bills.

“Even with the year-end approaching, traders do not foresee any significant demand. Defence-related payments are also being made on time, so no significant pile-up is expected,” it said.

“The most significant game-changer for Pakistan has been the tremendous success in increasing remittances. This alone is contributing to an increase of almost $6-8 billion annually and has resulted in month-on-month current account surpluses and better dollar liquidity in the market.”