Rupee falls for fifth day, touches new record low of 302/dollar

KARACHI: The rupee fell to a new record low against the dollar on Monday, extending its fifth consecutive decline, as the country’s balance of payments position deteriorated amid rising inflation and interest rate concerns.

The rupee dropped 0.33 percent to 302 against the dollar in the interbank market. The local currency fell by 1 rupee to 315 per dollar in the open market, according to the rates provided by the Exchange Companies Association of Pakistan.

The rupee is Asia's worst major performing currency so far this year, slumping 25 percent against the dollar.

Fears over the country's deteriorating balance of payments position have had a negative impact on the currency. Concerns about interest rates and rising inflation forecasts are other factors that are putting pressure on the local currency.

The apprehensions surrounding currency devaluation and elevated inflation figures are causing concerns among market players, said Chase Securities in a note.

"Clarity on interest rate decisions and future projections is expected to emerge with the impending Monetary Policy announcement scheduled for September 14, 2023."

However, some analysts expect that the central bank may raise interest rates in an off-cycle review meeting to prevent the currency from further depreciation.

If the letters of credit are opened up without any interruptions, Pakistan's external vulnerabilities will persist, despite the IMF programme, mostly due to dwindling dollar inflows amid growing debt servicing and import requirements.

Therefore, there would be increased pressure to keep the central bank's foreign exchange reserves at current levels in the coming months. Foreign exchange reserves would be depleted if more foreign currency inflows were to not occur.

Pakistan's foreign exchange reserves held by the central bank decreased by $125 million to $7.930 billion as of August 18.

Pakistan is likely to face a funding gap of $1.2 billion, assuming Saudi Arabia's deposits are rolled over and excluding potential current account deficit till December 2023, according to reports.

The government has budgeted $4.5 billion of loans from global commercial banks for FY2024. The grey market is negatively affecting the open market and interbank market, according to ECAP secretary general Zafar Paracha.

"The majority of inflows went to the grey currency market as a result of the government tightening foreign currency sale-purchase controls in the open market. Additionally, remittances are diverted to the grey market," Paracha added.

The rupee's fall in the interbank market was due to a decline in the rupee's value in the open market, a rise in demand for foreign currency as import restrictions were relaxed, and foreign currency inflows drying up.

The interbank has been under pressure as a result of the IMF's requirement that the difference between the open market and interbank rate not exceed 1.25 percent for any five consecutive business days. The open market was on the upper side. In addition, the IMF wants the currency rate to be set by the market forces.

The SBP has eased several import restrictions, which are also pushing up import payments and placing pressure on the rupee. Economic and political worries also led to the depreciation of the currency.

The currency lost more ground once the caretaker government assumed power on August 15. In addition to the economic incompetence, the political uncertainty has sapped traders' confidence.