October 12, 2021
  • October 12, 2021

Rupee stable against dollar next week

By on September 19, 2021 0

KARACHI: The rupee is expected to trade within the existing range next week amid a match between dollar supply and demand, while the central bank’s monetary position will also be taken into account, analysts said.

The rupee has seen some very volatile movements this week and hit an all-time low of 169.12 on Wednesday. The central bank’s dollar-selling interventions stopped the rupee’s fall, allowing the local unit to recover. The verbal intervention of the central bank also stopped speculative transactions. The rupee closed at 168.19 to the dollar on Friday.

“We see the rupee stable in the coming days, despite mounting economic uncertainty. The match between supply and demand for the greenback and the fall in the real effective exchange rate (REER) could stabilize the rupee, ”said a forex trader at a commercial bank.

Analysts said the 169-to-the-dollar level was not unprecedented, the speed at which it came in despite record reserves left everyone flustered, increasing uncertainty and raising self-doubt. Failure to intervene would have left this situation to worsen with increased dollarization, hoarding and reduced trade initiatives, they added.

August’s $ 1.5 billion current account deficit was one of the highest months on record. Markets are also seeing a strong exodus of foreign currencies from stock markets ($ 80 million in the first 17 days of September.

“The rupee looks comfortable, namely the RRSP of 97.38 in August, which shows that the rupee is undervalued by about 3 to 4 rupees,” an analyst said in a report released by Tresmark.

“While the rupee is expected to stabilize around the 168.50 figure for a few weeks, the situation between Afghanistan and Pakistan will take center stage when it comes to the direction of the rupee as other indicators ( reserves, CAD, remittances) could cause the local currency to drop. rupees here and there, but not be responsible for creating a new trend, ”he said.

The currency market in Pakistan does not have the depth and volume of a mature market. When sources of new money are scarce and players are fewer, the age-old quote of “supply and demand” becomes redundant, as there are no new buyers or sellers when prices are skewed. Therefore, the only way to achieve equilibrium is when the central bank steps in to eliminate excess supply or demand. Neither the number of market makers nor the infrastructure exist in the Pakistani market to make the market-based trading system operational without recourse. When money devalues, it contributes to imported inflation. This, in addition to existing structural inflation, increases the pressure to raise interest rates. When interest rates are raised, it not only increases the cost of doing business, but, since the government is the biggest borrower, it also increases the cost of financing and has a negative impact on the budget deficit, and again exerts pressure on the local currency. A vicious circle is thus created.

As one senior trader put it, “we need a solid peg in the SBP, which works as a forward direction.” In the opinion of some market participants, the central bank should also have intervened when the dollar fell below 155 (pre-Covid levels).

Regarding the Afghanistan factor, the report said that the burden Pakistan would have to bear as a result of this development was in the range of $ 500-700 million per month.