Rupee likely to gain ground

KARACHI: The rupee is expected to gain ground against the dollar next week aided by inflows from exporters and hopes for International Monetary Fund (IMF) loan approval, said traders and analysts.

The local unit lost 32 paisas to close at 176.24 to the dollar in the interbank market this week. It had ended at 175.92 on Monday (Jan 17).

“We are slightly bullish on the rupee next week as we expect the local currency to appreciate due to selling of dollars from exporters, lower import payments, and the likely approval of the $6 billion IMF Extended Fund Facility (EFF),” said a foreign exchange trader.

Analysts said the markets were gearing up for the coming week, which has two key events taking place; the central bank’s monetary policy on Monday and IMF’s executive board meeting scheduled for January 28 to consider Pakistan’s request for the completion of the sixth review and release of $1 billion tranche under EFF.

The financial markets see no change in the monetary policy this time and the State Bank of Pakistan (SBP) is expected to keep the policy rate unchanged at 9.75 percent. Traders are watching how the SBP’s monetary policy committee considers rising inflationary and external account pressure, while taking the interest rate decision next week.

“If the approval [from IMF] is granted, markets will witness a flurry of activities, including fresh bond issuance, multilateral engagements, more fiscal space generating a growth burst, expedited privatisations, relief from FATF [Financial Action Task Force], etc.,” said Tresmark in a report on Saturday.

The government is expected to issue a dollar sukuk in international markets soon. Moody's Investor Service assigned a B3 backed senior unsecured rating to the proposed US dollar-denominated sukuk issuance by the government.

Last week, the markets saw the government rebase its gross domestic product (GDP), leading to change in macros with GDP growth revised to above 5 percent. Some rumours about the emergency also kept investors on the sidelines, the report said.

The country’s foreign exchange reserves dipped 2.3 percent to $23.349 billion as of January 14 on servicing costs of loans. “Between all these, we see the finance ministry trying to raise $8 billion to fund the current account deficit gap (CAD projected to be just over $15 billion in FY2022). This is certainly doable, but it isn’t over till the fat lady sings,” the report added.

Higher interest rates have failed to generate hot money inflows, but there has been a welcoming trickle of foreign money in equities. REER (real effective exchange rate) for December, 2021 clocked in at 96.74, lower than the 98.56 recorded in November, 2021.

This was not surprising as REER is based on inflation differential and while inflation in Pakistan was very high, it was equally higher in other leading economies, causing the rupee to consolidate, it said.

“We also see the momentum of selling dollars forward to pick up significantly in the coming week.”

According to the report, this seems to be a great trade as leading analysts do not see the rupee over 180/$ for June close and with the status of the rupee as still being mildly undervalued.