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May 24, 2019

Rupee extends gains against dollar on improved supplies


May 24, 2019

KARACHI: The rupee snapped further losses against the US dollar during the second consecutive day on Thursday as huge oil deferred payment commitment by Saudi Arab restored confidence in the market, bringing the greenback supplies on track, dealers said.

The rupee gained 50 paisas to close at 151.45/dollar, up from Wednesday’s close of 151.95, in the interbank market. Dealers said the currency posted gains as banks sold dollars to improve supply in the market.

The rupee also managed to trade stronger in the open market on the back of improved dollar supplies. The rupee rose to 152.50/dollar from Rs153.

A currency dealer said the rupee is, however, unlikely to break resistance at 152/dollar during the current month.

“We expect pressure on the currency to ease further with strong remittances due to Ramazan and Eid (festivity),” the dealer said. “However, it will reverse recent gains and weaken over the next month hurt by current account slippages and imposition of new taxes in the upcoming budget.”

The rupee has depreciated by 3.74 percent against the dollar in the interbank market since last week, sparked by strong dollar demand and lack of the central bank’s support to rescue the battered rupee. The currency has cumulatively lost 37.45 percent since January 2018.

Analysts said fears of change in the exchange rate regime from managed to free-float following finalising an accord with the International Monetary Fund (IMF) for a three-year $6 billion bailout package also weighed down the market sentiments.

The State Bank of Pakistan (SBP), however, reiterated that the massive decline in the exchange rate was due to accumulated imbalances of the past and some role of supply and demand factors.

A banker said the SBP used to manage the rates previously throughout the day to control wild swings in the interbank market, “but in last few days we had seen absence of SBP’s control and market was going in one direction which was up”.

“All major economies manage currency movements and rates but in my view economy needs manage control on currency markets as our country is facing dollarisation by our domestic investors,” the banker said, requesting anonymity.

The central bank raised its policy rate earlier this week by 150 basis points to 12.25 percent that was seen as a move to stabilize the local currency and fight off runaway inflation after a steep increase in fuel and food prices.

Analysts said a major reason of the rate hike was weak current account performance, which despite improvement is still at the unsustainable levels. The tightening of monetary policy could help further improve balance of payments, they said.

The current account narrowed by 27 percent to $11.586 billion in the 10 months of current 2018/19 fiscal year. The central bank’s foreign exchange reserves depleted by $788 million to $8.057 billion as of May 17 due to external debt servicing and other official payments. The SBP said the current level of reserves is below standard adequacy levels – equal to three months of imports cover.

Analysts said the external account is expected to get some relief from the IMF’s inflows and oil deferred payment facility of $3.2 billion a year by Saudi Arabia, which will start from July 1. Under the facility, the country will receive petroleum products worth $275 million every month for three years.

Analysts believed that the rupee is in equilibrium and doesn’t need any further big devaluation.

A banker, however, said the interbank market might face pressure due to stagnant exports and imports acceleration that would make the market tend to be short of dollars to cover payments.