Rupee falls to 3-mth low of 139.25 as geopolitical tensions escalate

KARACHI: The rupee fell nearly three-month low to settle at 139.25 against the US dollar on Wednesday as escalating tension between neighbouring India and Pakistan weakened buyers’ sentiments to restrain greenback inflows in the interbank market, traders and analysts said.

The rupee lost 0.27 percent to close at 139.25 against dollar in the interbank market. Rupee closed at 138.87 against the dollar, a 0.21 percent weaker than 138.57 on Monday. The local currency, which traded at 138 versus the dollar since December last year, broke the psychological barrier of 139/dollar earlier in the session. The rupee closed at 139.05/dollar on November 30, 2018.

“On account of heightened tensions between India and Pakistan and FATF (Financial Action Task Force) stance to take further measures the currency market remained largely volatile in the last few days,” analyst Yaqoob Abubakar at Tresmark, an application that tracks financial markets said.

“Due to the fact the rupee seems wobbly in coming days and may lose its value against greenback, further hike is expected in coming days.”

Pakistan Air Force shot down two Indian jets inside Pakistani airspace in Kashmir on Wednesday, raising tensions between the two countries.

In the open market, the rupee lost 50 paisas and ended at 139.50 against the dollar compared with Tuesday’s close of 139.

A head of treasury sales at a small-tier bank expects the rupee-dollar parity to further weaken to 140 plus level in March and 143 by June “even if this geopolitical tension subsides”.

“Border tensions will increase problems for the rupee value, as stock market outflows will also hit the parity,” he said, requesting anonymity.

The KSE 100-share Index of Pakistan Stock Exchange lost around 1,000 points to come down below 39,000 points level in two days.

The Exchange Companies Association of Pakistan advised public not to pay attention to any rumours and abstain from the purchasing of unnecessary foreign currencies especially the US dollars.

Some traders, however, believed the currency tends to be little negatively impacted by worsening relations between the two countries. They said the foreign exchange market will remain move through a demand and supply mechanism. The size of the dollar inflows are likely to decide the future course of the exchange rate in the times to come.

The country’s current account deficit narrowed 16.79 percent to $8.424 billion in the July-January period of 2018/19 due to shrinking trade deficit. The foreign exchange reserves held by the State Bank of Pakistan, however, fell $163 million to $8.043 billion as of February 15.

Analysts said the geopolitical tension might affect the International Monetary Fund’s (IMF) deal and make Pakistan’s position weaker to negotiate with them a better deal without tough conditions attached.

The rupee depreciated almost 30 percent against dollar since the end of 2017.

A recent report published by Fitch Solutions said Pakistan and the IMF are likely to soon reach a $12 billion worth bailout agreement. A condition of tough fiscal consolidation seems to be attached to its potential loan.

Fitch Solutions said the present government might need to begin net purchases of foreign exchange in the inter-bank spot market, tighten its net international reserves targets, and increase exchange rate flexibility – the measures that helped the previous government raise reserves to $23.6 billion in September 2016 from $9.8 billion in September 2013, equivalent to an import cover of 7.2 and 2.6 months, respectively.

“Given the low levels of foreign reserves at present, we expect reserve accumulation to be one of the main objectives of the bailout package, to be achieved through similar measures to those in 2013,” it added.