Rupee hits almost 9-month low on rate cuts

KARACHI: Rupee plunged to almost nine-month low on Wednesday as back-to-back reduction in interest rates catalysed foreign capital flight from Pakistan's debt market.

The rupee lowered 1.63 percent or Rs2.60 versus the US dollar to close at Rs161.60 in the interbank market. It finished at 159 to the greenback in the previous session.

The local currency had closed at Rs160.78 in July 2019. The rupee touched an intraday low of 162.25, its lowest since June 2019.

In open trade, the rupee lowered Rs1.50 to end at Rs160 per dollar. Traders said foreign investors were upset on sudden decision of policy rate change by the central bank and resorted to panic selling of treasury bills (T-bills). The market is under a float regime that indicates further depreciation in the parity in coming days, they said.

“With the sharp and unexpected rate cut and huge stimuli, the rupee should have weakened by around 5 to 7 percent, but the rupee held better than expected,” said Eman Khan, an analyst at Tresmark, an application that tracks financial markets.

The State Bank of Pakistan (SBP) lowered policy rate by a cumulative 225 basis points to 11 percent in two monetary policy announcements in a week. This emergency move was designed to help the struggling economy from the fallout of preventive lockdown amid coronavirus disease.

Foreign investors sold net $95 million worth of T-bills on March 24, the SBP’s data showed. With this repatriation, total divestment in March reached $1.501 billion.

However, net investment in T-bills in the current fiscal year was $1.60 billion. Zeeshan Azhar, an analyst at Foundation Securities said domestic investors are moving money from bank deposits to hoarding dollars.

“PKR should continue to decline for a few more days as the SBP has also said that it is monitoring the situation and stands ready to act further should the need arise,” Azhar said. “If the SBP is intervening in the PKR-USD market by selling dollars, then its FX reserves would fall.”

The central bank's foreign exchange reserves fell by $110 million to $12.679 billion as of March 13. Dealers said the rupee came under severe pressure against the US currency after significant outflows of capital from the stock market and government bonds.

“The central bank didn’t intervene in the foreign exchange market to address liquidity or excessive market moves in the local currency,” a forex dealer, who declined to be named, said.

Khan of Tresmark also didn't see any intervention, “but (we) wouldn’t be surprised to see that tomorrow in order to keep markets liquid”. Azhar of Foundation Securities said sharp deterioration in rupee would further limit imports by making them more expensive thereby improving balance of payment position. The rupee hit an all-time low of 164.05 against dollar on June 27 last year.

Analysts said the COVID-19 turmoil is likely to hurt balance of payments in future. The expected decline in remittances and exports could put pressure on the current account deficit. However, drop in oil prices could lead to reduction in oil import bills.