Rupee seen stabilising around 285 next week

KARACHI: The rupee may stabilise near 285 against the US dollar in the coming weeks despite a visible squeeze in dollar liquidity, as analysts dismiss recent pressure as largely tactical and sentiment-driven rather than a fundamental deterioration.

The local unit closed at 283.7 on Friday in the interbank market -- its weakest level since December 2023 -- while importers were being quoted at 284.25-284.5, and open market rates hovered around 285.7. Banks, in a rush to boost official remittance flows, are offering Rs1-2above market to attract inflows, according to a note by Tresmark.

Despite this, analysts suggest there is little cause for alarm. Pakistan’s foreign reserves have almost doubled from $8.8 billion in June 2023 to over $17 billion now, and are expected to exceed $20 billion this month, bolstered by a projected $3.4 billion in inflows.

“The market may be short by around $300-400 million to make dollar liquidity truly comfortable,” the note stated. Exporters holding back proceeds in anticipation of rupee weakness and geopolitical jitters following the Iran-Israel conflict are also contributing to temporary tightness in the market.

Meanwhile, the central bank continues to mop up dollars from the market in a bid to meet its IMF-linked reserve targets, keeping the exchange rate under mild pressure. Pakistan’s real effective exchange rate (REER) stands at 97.8, indicating that the rupee remains slightly undervalued -- just under India’s REER of 98.57 -- offering a cushion for competitiveness. The current account is also projected to post a surplus this fiscal year, easing macroeconomic concerns.

Analysts see the government reluctant to allow a material depreciation of the currency due to inflation and political sensitivities. The rupee is expected to consolidate near 285 in July, though the FY2025 budget assumes an average rate of 290, setting an informal trading band between 283 and 297. Rating agencies, meanwhile, are forecasting levels as high as 298-305 by mid-2025.

“Gradual depreciation of around Rs1.5 per dollar per month -- roughly 6.2 per cent annually -- would remain manageable,” the note said. Oil price risks remain contained for now. While Middle East tensions persist, global dynamics are shifting. “We live in a world where Middle East oil is a lot less relevant to the US,” said Ali Meli of Monachil Capital Partners, citing the shale revolution and growing OPEC output. Brent crude is expected to cap near $83 per barrel. At that level, the impact on Pakistan’s import bill is estimated at $400 million annually, with a 2.0 per cent inflationary effect -- considered manageable barring a prolonged surge.