Rupee expected to remain range-bound

Our Correspondent
Sunday, Sep 04, 2022

KARACHI: The rupee is expected to trade in a range-bound manner against the dollar next week, depending upon demand and supply position of the greenback in the currency market, traders said.

Even though the International Monetary Fund’s (IMF) approval had already been taken into account, the markets sighed in relief when a $1.16 billion loan tranche arrived on Wednesday. The fresh disbursement came after the Washington-based lender revived a bailout package for a cash-strapped country. Resultantly, the rupee rose 1.32 percent to 218.98 versus the greenback in the interbank market the outgoing week.

The IMF money lifted sentiment as the country’s default worries eased and thus the foreign currency reserves are set to rise. As of August 26, the central bank’s foreign exchange reserves fell by $118 million to $7.7 billion, enough to cover little more than a month of imports.

The IMF’s board has approved an extension of the EFF till June 2023 instead of September 2022 to support programme implementation and meet the higher financing needs this fiscal year as well as unlock additional financing.

“The rupee seems to trade within a range of 218-19 in coming days. The currency move looks to be influenced by importer demand and inflows [supplies] from exporters and remitters,” said a forex trader.

“We think the rupee has stable now, but the economic fallout from the devastating floods in the country and skyrocketing inflation will dent sentiment on the rupee,” he added.

The consumer price index (CPI) inflation surged to a multi-decade high of 27.3 percent in August from a year earlier, according to the Pakistan Bureau of Statistics.

Although the hike in inflation was widely anticipated, the calamity caused by the heavy rains and floods made the figures worse and they may continue to be high for the next two months.

According to analysts, the growing inflation will probably have an impact on Pakistan Investment Bonds and Treasury Bills. Short-term bond yields have surpassed levels from 2008, and some market participants are preparing for another rate increase. However, the sudden 3 percent decline in GDP growth brought on by the flooding would force policymakers to reconsider and turn their attention to tools other than tighter monetary policy in order to fight inflation. The rupee is likely to remain under pressure on liquidity, and more so because of inflation. As per Tresmark estimates, the real effective exchange rate [REER] for August end should go up to 98.50 with parity at 218 per dollar.