Rupee rebounds to year-high level on strong inflows

KARACHI: Rupee hit more than one year high level of 155.74 against the US dollar in the interbank trade on Wednesday as foreign inflows propped up the currency value, analysts said on Wednesday.

The rupee rose 0.63 percent or almost Re1, its biggest single-day gain since August 27 last, from 156.72 on Tuesday. The current level is the highest after March 6 last year.

Traders said the rupee breached the 156 per dollar level amid thin dollar demand from importers for payments. Moreover, there were better inflows in form of remittances ahead of Ramazan and Eid holidays and into Roshan digital accounts.

“There were no significant payments today,” said a foreign exchange trader at a major bank. “Exporters continued to sell dollars to increase their profit margins in anticipation of further appreciation of the exchange rate.”

The rupee appreciated Rs12.69 or 7.53 percent since August last when it had hit an all-time low of 168.43.

Samiullah Tariq, head of Research at Pak-Kuwait Investment Company said the interbank market for dollars has excess supply. The government has availed some facility for import payments linked to oil and gas.

“Secondly, the REER [real effective exchange rate] numbers were lower than expectations, leading to an improvement in the market sentiment,” Tariq said.

Pakistan’s REER, weighted average of rupee value against a basket of currencies, decreased 1.05 percent in January to 95.3177 from 96.3266 recorded in December.

The government credit line from the International Islamic Trade Finance Corporation (ITFC) has also resulted in reduction of outflows from the market. The government last month signed a $1.1 billion trade financing facility with ITFC to import oil and liquefied natural gas in the current year.

The decline in REER and the news related to hiring banks from the government to sale foreign currency bonds in international markets lifted trader sentiment, boosting confidence about the outlook for the country’s economy.

The rupee also posted one-rupee gain against the dollar in a day in the kerb market. The rupee closed at 156.2 to the dollar, compared with 157.2 in the previous session.

Zafar Paracha, former secretary general of Exchange Companies Association of Pakistan said the local unit marched upward, tracking rise in the rupee’s value in the interbank market.

“The rupee continues to appreciate for a number of reasons. Oversea Pakistanis are increasingly sending money home through official channels, which have improved our inward remittances. Furthermore, the measures taken by the State Bank of Pakistan have started yielding results. The tightening of anti-money laundering and terror financing regulations by the SBP compel exchange companies to ensure the due diligence and know your customer of each customer while making transactions.” Paracha said.

Besides, the current account surplus and the increased forex reserves have also supported the rupee, he added. However, traders are skeptic about the current rally in the rupee, which is likely to trade at 155-156 level in the near-term.

The resumption of the International Monetary Fund’s loan program bodes well for the rupee.

However, the 38 percent increase in international oil prices since January has weakened the current account outlook. This could have negative implications for the rupee as well. “According to our estimate $10/bbl increase in oil prices results in a $2 billion increase in import bill. We point out that after posting successive surpluses in earlier part of FY2021 current account posted deficits of $652/229 million in December and January,” said Bank Alfalah Securities in a client note.

The current account surpluses are likely to turn into a deficit again as import pressure piles up. The rupee is expected to start to reverse its gains in the coming months.