KARACHI: The interbank foreign exchange market ended at Rs161.60 to the dollar on Wednesday, marking a sharp fall of Rs2.60 paisas from the previous day’s closing, according to the closing rate provided by the State Bank of Pakistan (SBP).
Earlier in the day, the Pakistani Rupee experienced a massive depreciation of Rs3 during intraday trading against the dollar, driven by significant outflows of hot money, market sources reported.
These outflows were primarily attributed to foreign investors withdrawing large amounts from funds invested in the domestic debt market. This move by foreign investors followed the central bank’s unexpected decision to reduce the policy rate.
On Tuesday, the SBP announced a reduction of 150 basis points in the policy rate, bringing it down to 11 percent. This followed a previous reduction just a week earlier, where the policy rate was cut by 75 basis points, lowering it from 13.25 percent to 12.5 percent. In total, the central bank has reduced the policy rate by 2.25 percent over the past week.
Market sources indicated that the abrupt decision to cut the policy rate had unsettled foreign investors, leading to panic selling of treasury bills. The significant policy rate reductions, aimed at stimulating economic activity amid challenging economic conditions, seem to have backfired in the short term, causing instability in the foreign exchange market.
The central bank’s aggressive rate cuts are part of broader efforts to mitigate the economic downturn. However, the rapid changes have raised concerns among investors about the stability and predictability of Pakistan’s economic policies. The withdrawal of foreign funds has put additional pressure on the rupee, exacerbating its depreciation against the dollar.
Financial analysts noted that the depreciation of the rupee against the dollar could have multiple repercussions on the economy. While a weaker rupee against the dollar might benefit exporters by making Pakistani goods cheaper on the international market, it also increases the cost of imports, which could lead to higher inflation. Furthermore, the rupee depreciation against dollar could increase the burden of foreign debt repayments, which are denominated in dollars.
The SBP is likely to face continued scrutiny over its policy decisions, as it balances the need to support economic growth with the imperative to maintain financial stability. The recent volatility in the foreign exchange market underscores the challenges faced by the central bank in navigating the complex economic landscape.
In the coming days, market observers will be closely watching the SBP’s next moves and any further reactions from foreign investors. The stability of the rupee and the overall economic outlook will depend significantly on the central bank’s ability to manage these dynamics effectively.
