Rupee hits 21-month high on dollar inflows

KARACHI: Rupee surged to 21-month high at 154/dollar on Tuesday, buoyed by strong remittance inflows, dollar selling by exporters, multilateral loan approvals, and Eurobond sale in international capital markets.

Expected dollar inflows due to resumption of $6 billion International Monetary Fund (IMF) bailout programme also added to the positive sentiments.

In the interbank market, rupee closed at 153.09 per dollar, its strongest since June 13, 2019, and 94 paisa or 0.62 percent stronger from the previous close of 154.04.

“There was heavy supply throughout the day. Most of it was remittances, Roshan Digital Account and exporter-linked dollar inflows,” said a dealer with a commercial bank.

“Today, the rupee rose on Eurobond marketing and ADB (Asian Development Bank) news. Media reports said Pakistan began marketing Eurobond worth around $2 billion to raise funds from international markets, and the ADB approved a $300 million loan to Pakistan, which boosted the rupee,” he added.

Pakistan is marketing the notes in three parts, with the initial price guidance on the longest 30-year tenor in the 8.875 percent to 9 percent range, Bloomberg reported, referring to the Eurobond. However, a report from Topline Securities expects the country to raise more than $2 billion from the dollar-denominated Eurobonds in next few days. Initial indications suggest 5-year bond’s bids to be between 6.0-6.5 percent, and 10-year bonds between 7.2-7.7 percent, it added.

The rupee has appreciated by a staggering 9.8 percent against the dollar so far this fiscal year. It rose 4.4 percent year to date in 2021. The rupee gained 3.2 percent in March alone. In the open market, the rupee closed at 153.70 versus the greenback, 0.58 percent or 90 paisa higher than Monday’s close of 154.60. “The key reason behind the appreciation is the recent re-initiation of the IMF programme. Secondly, Pakistan is planning to float Eurobonds of $2 billion and above, which are likely to get good interest from potential investors,” said Saad Hashemy, an executive director at BMA Capital.

“Thirdly, the World Bank and ADB have also reportedly committed funds to Pakistan. All this will help improve foreign exchange reserves and confidence in rupee. A rising rupee will greatly help attract investment flows, which will serve to strengthen the external account further.”

Dealers said the local unit would stay stronger in anticipation of release of about $500 million from the IMF to Pakistan as the Fund’s board completed the pending reviews of the Extended Fund Facility.

The rupee is also likely to be supported by inflows to check in next month because of Ramazan and Eid-ul-Fitr.

“In the near-term, we expect the pair to appreciate further to 151 to 152 per dollar. Tomorrow we may test 153 level,” said another dealer. However, the future direction of the rupee would be dependent on the forex strategy of the central bank, dealers said.

The rally in the rupee would not lessen unless the State Bank of Pakistan intervenes in the market. Some analysts expect the SBP’s intervention in the market sooner than later owing to an anticipated increase in the Real Effective Exchange Rate (REER). They estimate REER to be over 100.

Analysts were also concerned about the country’s exports, which might slow down due to the coronavirus-related lockdown in Europe. Furthermore, the debt repayments of around $3 billion by the end of this fiscal year would also put pressure on the forex reserves as well as the currency. Analysts believe the flexible exchange rate regime would work as an initial shock absorber for any imbalance current account deficit position, followed by policy rate adjustment. At present, the current account remained positive at $0.8 billion mainly aided by stable exports and higher remittances, while lower services deficit also played its part.

“We expect higher oil imports due to increase in both prices and volumes, rise in machinery imports on account of TERF (Temporary Economic Refinance Facility) backed imports and further rise in wheat and sugar imports to burden the foreign exchange reserves,” said an analyst at Insight Securities in a report last week.

The SBP’s reserves are currently hovering at $13.2 billion, an import cover of over 3 months. Therefore, it does seem that CAD would remain 0.3 percent of GDP in FY2021, he added.