Rupee sinks to record low of 169.60 to dollar

KARACHI: Rupee slumped to an all-time low on Monday mostly driven down by swelling import payments, skyrocketing commodity prices, and a ballooning current account deficit.

The rupee ended at 169.60 to the dollar—its weakest ever closing—down from the previous close of 169.08. It fell 52 paisas or 0.31 percent. In the open market, the rupee was quoted at 171.60 against the dollar at close, compared with 171 on Friday.

Traders said a further downside in the currency was quite expected given the substantial rise in dollar demand from importers despite the central bank’s intervention in the form of measures taken by it to prevent the local unit from declining more.

“Payments were high and there are more due in the coming days so there was some position building as well. In addition, the sentiment on the rupee is also weak,” said a foreign exchange trader.

Samiullah Tariq, the head of research at Pak-Kuwait Investment Company said the demand for the dollar is higher than supply due to higher commodity prices, supply chain bottlenecks and uncertain situation in Afghanistan.

“As the SBP is following a flexible exchange rate, exchange rate parity is going in favour of the US currency because of higher demand,” Tariq said. Brent crude oil headed for 80 dollars per barrel due to supply concerns as demand picked up in many parts of the world amid ease in pandemic-related restrictions.

The local currency, which hit its previous record low on September 12, remains under pressure as trade and current account deficit have widened largely due to soaring import bill. The rupee depreciated 1.63 percent since the start of this month. It fell 10.21 percent since its recent high on May 14, 2021 and 7.11 percent since June 2021.

The central government and the central bank have taken steps to lower the demand growth and attain fiscal and external discipline. The SBP raised the policy rate by 25 basis points to 7.25 percent.

It is expected that an increase in the policy rate coupled with the regulatory measures to lower imports may keep demand in check. The SBP has directed banks to submit information related to their all expected payments (imports) of $500,000 and above for the next five days. The central bank has also strengthened the existing data reporting mechanism to further sharpen its market liquidity projections. This facilitates, supports the smooth functioning of a flexible and market-determined exchange rate system.

Besides, the SBP has tightened conditions for consumer finance. The government plans to issue Islamic dollar bonds of $1.5 billion, increase in cash margins for luxury imports, more proactive reporting of trade, integrated reporting of tax and returns, verbal intervention on inflation, etc.

Analysts see the outlook for the rupee bullish in the near-term. However, as a reentry into the IMF programmes unlocks funding, the rupee will start to stabilise. The rupee is likely to depreciate by another 3-5 percent till June 2022.