Karachi, January 28, 2024 – The Pakistani Rupee (PKR) is anticipated to maintain its stability against the US dollar in the upcoming week, starting January 29, 2024.
Following a week of marginal gains in the interbank foreign exchange market, the rupee concluded at 279.59 against the dollar on Friday, a slight improvement from its Monday closing rate of 279.85.
Tresmark, a financial terminal, highlighted the importance of a robust local currency policy to counter imported inflation. The decline in the rupee’s value can contribute to an increase in the component of imported inflation. In response, a commitment to a stable or stronger local currency has been adopted to mitigate this impact.
In a weekly note, Tresmark emphasized the persistent challenge of inflation, labeling it as the nation’s primary impediment to economic prosperity. Globally, many economies prioritize managing inflation over fostering economic growth, making it a critical issue that requires strategic attention.
The year 2023 witnessed Pakistan grappling with its highest-ever inflation, leading to the devaluation of its currency to record lows. A $3 billion International Monetary Fund bailout package in July averted an imminent sovereign default. The consumer price index inflation rose to 29.7 percent in December from 29.2 percent in November, underscoring the urgency for effective economic measures.
Tresmark provided insights into the rupee’s performance, noting that at the beginning of the fiscal year, the rupee/dollar parity stood at 286. A typical yearly depreciation of 7–10 percent was expected, aligning with historical trends to support exporters and maintain the real effective exchange rate close to par. Contrary to projections, the rupee is currently around 2 percent stronger, making further depreciation unlikely.
The analysis suggested that the new government, unless faced with a significant decrease in inflation, is unlikely to implement drastic changes. Consequently, the rupee is expected to maintain its course towards a soft close by June 24.
Exporters, contending with global manufacturers and domestic challenges like rising cotton prices, energy, and labor costs, are opting for forward-selling of dollars to hedge their sales. Tresmark observed a concerted effort to keep swap premiums high, even amid declining interest rates, to support forward selling.
The reduction in the central bank’s aggregate swap positions from $4.5 billion in June 2023 to $3.2 billion suggests a cautious approach. Despite this, the stable currency has led to increased trading activity, heightened business confidence, a robust stock exchange, and a surge in portfolio investments. Month-to-date inflows are estimated at around $46 million, with foreign investors contributing approximately $19 million through the purchase of market treasury bills.
In a recent poll conducted by Tresmark, 83 percent of participants expressed the belief that there would be no rate change in the upcoming monetary policy review meeting on Monday. The prevailing sentiment is that there will be no rate cut for at least another two months. While the State Bank of Pakistan projects a substantial decrease in inflation, revisions in energy and fuel prices are expected to keep inflation levels elevated.
