Rupee posts second biggest weekly gain in nearly two months

KARACHI: The rupee posted its second biggest weekly rise in around two months on Friday as a positive outlook for the currency after Ishaq Dar took charge as the finance minister, a fall in global commodity prices, and expected aid inflows from bilateral and multilateral creditors supported the local unit.

The domestic currency ended at 228.45 per dollar, 0.52 percent stronger than Thursday’s close of 229.63. It gained 4.9 percent during the outgoing week, second-biggest rise since August 5, 2022, when the local unit had gained 15.3 rupees.

The rupee has appreciated by 11.2 rupees week-on-week. It is the second highest weekly recovery in absolute terms, according to Arif Habib Limited.

In the open market, the local unit closed flat at 230 to the dollar.

Analysts said the return of Ishaq Dar and his subsequent remarks about the rupee being undervalued, as well as prospects of future stability in economic policy, were responsible for the current improvement in the currency.

In addition, it is anticipated that the current finance czar will hold onto his position and implement sound policies for a longer period of time. The expected multilateral and bilateral flows post floods are also likely to ease pressure on foreign exchange reserves along with the rupee.

Despite appreciation of the rupee, the foreign reserves continued to fall. The central bank’s foreign exchange reserves decreased by $341 million to $8 billion during the week ended September 23 on higher external debt payments.

REER index appreciates to 94.3 in August

Pakistan’s real effective exchange rate (REER), the value of the rupee against a basket of trading partner currencies, rose to 94.3 in August from 93.2 in the previous month, the state Bank of Pakistan reported on Friday.

The appreciation in the REER index is owing to higher inflation in the country, compared to trading partners, the central bank said via its official Twitter handle.

The REER shows relative competitiveness of the rupee versus trade-weighted basket of currencies, said Samiullah Tariq, head of research at Pak-Kuwait Investment Company.

“In the short term, 1-2 percent movement doesn’t matter, but in the long term, if the currency is overvalued like 125-130, the country may face an increase in the trade deficit,” Tariq said.

He added that as far as the value was below 100, it would be an issue. Secondly, due to major movement in global currencies, the REER might also increase which will get corrected over time, according to Tariq.

However, JP Morgan estimates REER to be around 97 levels.

REER helps analyse the country’s competitiveness for its trade in goods and services with its trading partners and competitor countries. It’s defined as the number of units of foreign goods, which can be exchanged with one unit of domestic goods.

It is calculated by considering several cross-country factors such as foreign exchange reserves, fiscal balance, credit demand, demographics, real interest rate, country risks and workers’ remittances, and other global financial indicators.