Rupee likely to continue depreciating next week on demand from importers

A man shows US dollars at a currency exchange store on October 21, 2022 in Manila, Philippines.  - Reuters
A man shows US dollars at a currency exchange store on October 21, 2022 in Manila, Philippines. – Reuters
  • Importers have increased purchases of dollars to pay for goods and services.
  • The rupee opened this week at 279.26 and closed at 286.81 on Friday.
  • “The market is worried about the sharp depreciation of the rupee,” says the dealer.

KARACHI: The rupee may slide further into the next week as importers increased purchases of the dollar to pay for goods and services, while the government resisted taking measures to stem the currency’s decline in line with the International Monetary Fund’s bailout condition so that the exchange rate reflects market forces. news Reported on Sunday.

During the last week in the interbank market, the local unit depreciated by 2.63 per cent or Rs 8 against the dollar. The rupee was trading at 279.26 against the dollar on Monday, but fell further on Friday and ended the day at 286.81.

“We expect the rupee to remain under pressure next week due to demand for US dollar for import payments and lack of central bank intervention to arrest rupee fall as per IMF requirement,” said a forex trader.

Although the rupee weakened, the country’s foreign exchange reserves got a boost. As of 14 July, the foreign exchange reserves of the State Bank of Pakistan increased by $4.2 billion to reach $8.7 billion.

The country’s total reserves increased by $4.2 billion, totaling $14.1 billion. Reserves of commercial banks increased by $24 million to $5.3 billion.

According to SBP, the last week saw a significant increase in SBP’s reserves due to inflows of $2 billion from the Kingdom of Saudi Arabia, $1.2 billion from the International Monetary Fund and $1 billion from the United Arab Emirates.

After the IMF event, the market was expecting the letter of credit confirmation fee to normalize. Unfortunately, they are still hovering around 7%-8% and some lobbying may be required to bring it down to the pre-crisis level of 35 basis points, Tresmark said in a note.

It added, “Markets are worried about the sharp depreciation of the rupee, which had depreciated by nearly Rs 8 last week. With SBP directing banks to self-manage import payments, banks are rushing to fund their nays and are eagerly buying the dollar.”

In fact, some banks are offering rates of more than 7 percent on dollar deposits to attract fresh foreign currency.

“Additionally, some stalled defense payments (usually made by the end of June) have been completed by July.

With ‘slow move’ on opening of new LCs, analysts expect rupee to strengthen between 286-290 zone, especially as ADB [Asian Development Bank] And the World Bank’s commitment will begin to materialize and China’s $600 million rollover will provide a liquidity boost.”

According to Trezmark, the IMF’s suggested solutions may be correct in principle, but they do not work for Pakistan.

The note explained how to fight the fiscal problem with the monetary measure of raising interest rates, determining the free forex market where there are no market makers in a highly regulated and unregulated market, and finally advising that the interbank market should be closer to the open market.

With the rupee still undervalued based on the real effective exchange rate (the latest number for June was 87.75), the IMF could have set some more scientific rules, such as purchasing power parity, for a reasonable rupee value.

“In fact, the rupee is undervalued even on the Big Mac index (GDP adjusted or otherwise). The open market is very weak compared to the interbank market (in terms of volumes),” Tresmark said.

“But all this also shows the failure of the government to convince the lender on these aspects, even though there are enough weapons in the form of past precedents and other economies to persuade them.”

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