Rupee likely to hover around Rs161-166 against dollar in 2021

KARACHI: The rupee is likely to hover in the range of Rs161 and 166 against the US dollar in the coming year, taking cue vividly now much from market forces and that means imported inflation and Covid management will guide its direction, analysts said on Wednesday.

The rupee is forecast to weaken next year, said analysts.

“In my view, the currency should depreciate as per historic inflation differential, which should be approximately 3-4 percent, meaning it should trade around 165-166 by December 2021,” said Samiullah Tariq, head of research at Pak-Kuwait Investment Company. “Upside risks are improvement in financial inflows and privatisation, while downside risks are major rally in oil and other commodity prices,” Tariq added.

Being artificially overvalued before, the rupee has adjusted 60 percent in value since FY2017 after putting in place a market – based mechanism as desired by the IMF in 2018. The rupee now clearly trades according to market forces – reflected in the interbank and Kerb markets rates, Taurus Securities said in a report last week.

Since December 2018 the rupee’s real-effective exchange rate has remained under 100, indicating that it is fairly valued compared to other benchmark currencies, it said.

Taurus Securities predicted the rupee to adjust during the second half of FY2021 on account of rising import bill due to pick-up in oil prices as well as imports for the domestic industrial sector. Similarly, as Covid-19 vaccines start circulating and lockdowns ease, it expects global benchmark currencies to strengthen against the rupee.

“Overall, we expect an average parity of PKR 164.7/USD for FY21,” it said.

Much depends on vaccine rollouts as it would help the domestic economy as well as global economies shake off the pandemic grip soon. Where the rupee/dollar parity goes in 2021 depends more on the country’s import bill, the international oil prices, external debt repayments and financial inflows, and the resumption of the $6 billion worth International Monetary Fund’s extended fund facility for Pakistan, analysts said.

Higher oil prices in 2021 are expected to affect the import bill and swing the current account back to a small deficit. For FY2021, the current account deficit seems to be below 2 percent of GDP.

The rupee was on a rollercoaster ride in almost the entire course of 2020. Having firmed at 154 levels against the dollar from January 1 to March 6 due to significant inflows in the portfolio investment and multilateral financial support, the local unit drastically weakened, hovering at 166 in June. The portfolio outflows following the spread of the coronavirus pandemic caused uncertainty in the global financial markets, forcing investors to run for safety.

The local unit hit a record low of 168.43 versus the greenback in August, weighed down by an anticipated spike in economic activity with a surge in imports after the Covid-19 lockdown ended. Fiscal imbalances amid increasing monetary easing and higher loan repayments, stalled IMF’s loan program also dragged down the local unit.

Finally the rupee settled at 160 mark thanks to the current account surplus for the last five months of this fiscal year, strong foreign exchange reserves, healthy remittances and dollar inflows from the multilateral sources. Increased inflows from Roshan Digital Account (RDA) also helped in fueling the rupee’s gain. The RDA provides overseas Pakistanis access to a full range of banking services and investment opportunities in Pakistan from wherever they reside. The rupee closed at 154.87 per dollar on January 2 in the interbank market. As of Wednesday (December 30) afternoon, the currency was quoted closing at 160.28 against the greenback.

The rupee has depreciated by 3.49 percent in 2020. In the open market trade, the rupee has fallen by 3.38 percent in the outgoing year. The rupee ended at 160.35 to the dollar on Wednesday. It had finished at 155.10 on January 2. Despite all ups and downs, the rupee has been one of the least volatile currencies in the region in the outgoing year trading mostly within a band of 154 and 168, while it is likely to keep up in the same range in 2021. Between October and November, the rupee has secured third best-performing position in Asia after Indonesian Rupiah and South Korea Won.