KARACHI: The rupee dropped to its lowest level since May 20 as a spike in global crude oil prices threatened to push domestic inflation pressure further up and aggravate the country’s current account deficit, dealers said.
The currency also came under pressure on speculation that the government could freeze foreign currency bank accounts to ease dollar shortages. In the interbank market, the rupee ended at 200.06 per dollar. It closed at 197.92 on Friday. The currency depreciated by 1.07 percent on a day-to-day basis. The rupee fell to an all-time low of 202.1 on May 26.
The local unit dropped by 2.50 against the dollar in the open market. It was trading at 201 in the kerb market, according to the rates from the Exchange Companies Association of Pakistan. “The demand [for the rupee] is higher than the supply as import demand has increased due to higher commodity/ fuel prices,” said Samiullah Tariq, the head of research at Pak-Kuwait Investment Company.
Oil prices topped $120 a barrel on Monday buoyed by Saudi Arabia raising its July crude prices but amid doubts that a higher output target for OPEC+ oil producers would ease tight supply. Analyst Mustafa Mustansir at Taurus Securities said higher oil prices will exacerbate the current turmoil further.
“Inflationary expectations amid rising fuel, power and gas prices are making the case for holding savings in the dollar rather than the rupee,” Mustansir said. “Rupee is losing its purchasing power.” The rumors that the government could freeze or place restrictions on withdrawals from foreign currency accounts, Roshan Digital accounts and safety deposit lockers spooked bank customers, further eroding investor confidence in the country’s currency. However, the government and the central bank both denied saying there is no such proposal under consideration.
“The rupee’s slide is partly due to Moody's outlook downgrade but could be due to these rumours,” analyst Fahad Rauf at Ismail Iqbal Securities said. “That is why SBP and the finance ministry both clarified the situation to avoid panic redemptions from RDA.”
The country’s foreign reserves have been depleting at a faster pace, falling to $9.7 billion, less than 45 days of imports. Besides, the country is also struggling with double digit inflation.
At the moment, all efforts are being made to get IMF’s approval on the Extended Fund Facility. “However, it seems that this will go down to June end. By then, the operation will be successful but the patient will have died. IMF’s approval needs to be expedited on war footing,” Tresmark said in a report.
“Better administration and intervention should be a priority. This should keep a check on disproportionate increase in essential items (food, transport, etc.). It should also be used to kill demand (work week, retail market timings, slowing down imports, etc),” it said.
“Even in the FX market, verbal intervention should check sharp volatility. Pakistan’s trade constituents are fairly inelastic and a level of 180 or 220 does very little to stabilise the apple cart and is not worth the negative consequences of a devalued currency especially if it's already undervalued.”
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