The Pakistani rupee is anticipated to maintain a narrow trading range against the US dollar over the forthcoming week. Market participants are keenly awaiting the State Bank of Pakistan’s (SBP) interest rate decision on November 4, which is expected to significantly influence the local currency’s trajectory.
The rupee has been oscillating between 277.6 and 277.9 in the interbank market this week. Currency dealers predict that the local unit will likely consolidate around its current level in the upcoming trading sessions, as investors closely monitor the SBP’s monetary policy stance.
The rupee concluded the week at 277.64 to the dollar on Friday, recovering from losses incurred earlier in the week. A majority of analysts and brokerage houses anticipate a 200 basis points (bps) reduction in the policy rate by the SBP’s Monetary Policy Committee. Such a move would mark the fourth consecutive rate cut since June, bringing the total reduction to 650 bps.
The SBP has already implemented rate cuts of 350 bps in July and September 2024, resulting in a cumulative reduction of 450 bps since June 2024.
Currency dealers believe that the steady increase in foreign exchange reserves and the persistent improvement in the external account will further bolster the rupee’s stability in the coming sessions.
The SBP’s reserves increased by $18 million to $11.04 billion as of October 18. However, the country’s overall forex reserves declined by $94 million to $16.017 billion, while commercial bank reserves dropped by $112 million to $4.976 billion.
Pakistan’s current account registered a surplus of $119 million in September, marking the second consecutive monthly surplus after a $29 million surplus in August and a $218 million deficit in September 2023.
During the first quarter of fiscal year 2025, the country’s current account deficit narrowed to $98 million, a significant 92% decrease compared to the same period last year.
While market sentiment suggests expectations for a rate cut exceeding 200 bps, Tresmark, in a recent note, indicated that the SBP may adopt a more cautious approach during this phase of economic stabilization.
The note highlighted a notable $74 million outflow of T-bills from Special Convertible Rupee Account (SCRA) accounts as of October 11, alongside a decline in swap premiums, which has reduced incentives for exporters to lock in forward deals.
The SBP’s liquidity statement from August 31 revealed that the central bank conducted approximately $300 million worth of sell-buy swaps to support premiums, but these measures appear insufficient to create a sustainable impact.
Interestingly, the decline in forex held by private banks over the past three weeks suggests that investors are shifting towards more attractive assets, particularly as the Real Effective Exchange Rate (REER) clocked in below 100 (98.5), indicating limited pressure on the rupee to weaken.