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January 24, 2021

Rupee may weaken

Business

January 24, 2021

KARACHI: The rupee is expected to trade slightly weaker against the dollar next week, hurt by an appetite for the dollars from oil importers, traders said.

“We might see buying pressure from oil importers. Acceleration in the economic activity means a rise in the demand for the dollars to pay for energy, machinery, and equipment imports,” a foreign exchange trader said.

“The inflows may not be enough to meet the market demand. So, we anticipate the rupee to touch 161 level to the dollar with the chances of losing a bit of more ground if the inflows are not adequate to compensate.”

The rupee fell 0.14 percent, or 23 paisas, to close at 160.75/dollar in the interbank market during the outgoing week. Analysts said the rupee has a strong support line at 161.20, and it seems unlikely that will be taken in the next week.

“To see why the rupee weakened, we will need to see interest rates. While mostly range-bound, bonds and swaps jumped slightly when the central bank announced its monetary policy, but then eased down, as the markets realised that the central bank will maintain the status quo, and with no additional incentives in the interest rates, bought the dollar,” a Tresmark in a weekly report said.

The State Bank of Pakistan (SBP) in its monetary policy kept interest rates unchanged at 7 percent and also guided markets (for the first time) of stable interest rates in the near-term.

“Markets interpreted near-term as around May, as that is when typically inflationary pressures (Ramazan) build-up. Similarly, while macros are healthy (including exports, remittances, and current account), the new year typically brings some fresh payments and adjustments, and as outflows outpace inflows, pressure on the currency builds up,” it added.

State Bank of Pakistan Governor Dr Reza Baqir, in a post-monetary policy meeting on Friday, said that the flexible exchange rate system proved an effective way to absorb external shocks, in the toughest times of the coronavirus pandemic.

Pakistan’s exchange rate has not been hit hard by the adverse impact of the pandemic. World capital flight from risk assets to safe-havens assets triggered currency depreciation in most of the emerging markets from 15 percent to 21 percent.

However, the local currency has faced only a 3.8 percent slide against the dollar, compared with the other emerging countries during January 2020 to January 22, 2021, he said. Analysts see the impact of the recent increase in the international oil prices to be visible in the coming months’ imports.

However, they estimate the current account balance to remain largely the same at around $1.5 billion, or 0.5 to 1 percent of GDP in FY21.

Pakistan’s current account clocked in a deficit of $662 million in December versus a surplus of $513 million in the previous month, the worst since October 2019. The rupee is expected to weaken to 166 by June and 172 by the end of December.