Sunday September 19, 2021

Rupee to remain under pressure

August 01, 2021

KARACHI: The rupee is likely to face continued pressure against the dollar over the next week due to heightened demand for greenback amid limited inflows, traders said.

“We expect the rupee to remain on defensive in the coming sessions,” said one trader.

“The local unit looks to be weaker in the range of 162.40 to 162.80 going into next week. Demand for the dollar is strongest from the machinery and oil importers,” he added. “There are large oil payments lined up for the coming week. Once these payments are made, we can see the domestic currency start to consolidate.”

However, some dealers said the rupee might experience a mixed trend as higher import payments were putting pressure on it, but strict anti-virus lockdown in the province of Sindh was likely to affect the daily economic activity that generates demand for the US dollar. This could keep demand for the US dollar limited.

Sindh government on Friday imposed a partial lockdown on Sindh from July 31 to August 8, with focus on Karachi to stem the fourth wave of the coronavirus pandemic, due to alarming increase in the infection cases gripping the province, especially the provincial capital.

The rupee lost ground in the interbank currency market because of a spike in demand for the dollars from importers who bought the greenback to make their payments fearing a protracted lockdown in Karachi. The situation worsened due to higher than normal oil payments in the system.

The rupee depreciated by 93 paisas or 0.57 percent versus the greenback during the outgoing week. It had opened the week by closing at 161.50 per dollar, and ending at 162.43 to the dollar on Friday.

The US dollar traded lower against most of the major currencies on the back of the Federal Reserve’s monetary policy announcement. As per Fed’s monetary policy announcement, there’s no immediate cause of alarm or shift in expectations to taper earlier than expected. With this, analysts expect a gradual sell off of USD and other currencies to strengthen.

The State Bank of Pakistan (SBP) kept the policy rate unchanged at its latest meeting held on Tuesday. The Monetary Policy Committee (MPC) expects the policy to remain accommodative in the near-term, and any adjustments in the policy rate to be measured and gradual to achieve mildly positive real interest rates over time.

If signs emerge of demand-led pressures on inflation or of vulnerabilities in the current account, the MPC noted that it would be prudent for monetary policy to begin to normalise through a gradual reduction in the degree of accommodation.

Forward guidance is almost the same, but weakness in the current account may influence future degree of monetary accommodation.

It seems that the SBP will monitor the position of other major central banks, especially the Fed, to maintain a loose or tight monetary policy stance.

“We believe the central bank will continue to wait and watch for any unexpected inflation spikes and/or current account deterioration before deciding to reduce the degree of accommodation. The Covid-19 cases too will continue to influence SBP’s future decisions,” said an analyst at Topline Securities in a report.