Rupee seen stable next week on SBP rate hike

KARACHI: The rupee is expected to stay stable at around 184 levels against the dollar next week after the central bank increased the interest rates, and took measures to cut imports and reduce inflationary pressures, analysts said.

The Supreme Court’s decision to dismiss the Speaker’s ruling on the no confidence motion against PM Imran Khan also gave some support to the domestic currency that had suck to record lows of 17 consecutive sessions since March, they added. The local unit depreciated by 1.49 percent during last three sessions, hitting an all-time low of 188.18 against the dollar in the interbank market on Thursday. The currency, however, recovered from almost three weeks’ losses and closed at 184.68 on Friday.

“There has been a concern that what would happen if the political conditions don't normalise, but the currency market is unlikely to give a negative knee-jerk reaction to the fast-changing political developments,” said a foreign exchange dealer.

“The central bank’s measures also gave confidence to investors and markets. We expect the rupee to be stable in coming week,” he added.

While the pressure on the currency has been relieved for the time being, this war is far from won, according to a report from Tresmark.

“There are some positives: remittances are expected to shoot up due to Ramadan, exports are following a robust trajectory, and outflows from SCRA [special convertible rupee account] have slowed down,” it said. The report, citing analysts, said the central bank was targeting a real effective exchange rate of around 95 (it was 97.80, at the end of February) which would come to approximately 185/$ for today.

“However, new incoming government will need to get the IMF quickly back on track and garner support to boost reserves, and foreign investors will need to be wooed back.”

“Interest rates may need another round of adjustment really soon and non-essential imports may require to be temporarily halted,” it added.

The rupee crashed to its all-time low, primarily on the political vacuum of having no government. The crash might also have contributed to International Monetary Fund (IMF) adjourning its program temporarily and lack of clarity of China’s rollover of deposit. The forex reserves held by the State Bank of Pakistan (SBP) fell to $11.139 billion in the week that ended on April 01. The reserves were at a record high of $20 billion in August 2021.

Traders and analysts were deeply concerned with the rupee's rapid depreciation and fallout in the form of increased inflation, dollarization, and erratic settlement of trade obligations, the report noted. Investors were already spooked by the crisis unfolding in Sri Lanka. In such a situation, it also seemed that intervention by the central bank would be futile.

On Thursday, SBP called for an emergency monetary policy meeting and sharply lifted the interest rates by 250 basis points to 12.25 percent. Although, this was announced in the monetary policy statement on Thursday, trading in secondary markets and cut offs from recently held auctions had already signaled a sharp lift off. “This showed SBP’s intent and resolve to combat the emerging situation proactively and was mostly cheered by the market,” the report said.

A host of other measures were also announced by the central bank with an objective to reign down imports. All of this, along with some supply of dollar liquidity, had the desired effect and the next day rupee strengthened all the way to 184.50. According to the report, the episode also underlined some benefits of making institutions independent and strong.