- The rupee gains 0.11% against the US dollar this week.
- Tresmark expects the rupee to remain range-bound.
- It is expected to test the 278 level if there is no rate cut.
KARACHI: The stability of the rupee against the US dollar over the next week remains dependent on the International Monetary Fund's (IMF) review of the $3 billion standby arrangement and interest rates. News reported on Sunday.
The local currency is expected to remain stable if the IMF review concludes positively and interest rates remain unchanged, analysts said.
The rupee gained slightly against the dollar in the interbank market this week and closed at 278.74 on Friday. In the five trading sessions of the week, the value of the local unit increased 0.11%.
“We expect the rupee to remain range-bound if there are no surprises on the IMF (International Monetary Fund) front. If there is a rate cut, it could falter but then come back into line. If there is no rate cut, we could see it test the 278 level,” Tresmark said in a weekly note on Saturday.
The four-day review of the IMF lending program is underway since Thursday and the current SBA is set to expire in April. If the talks end successfully, Pakistan will receive a final tranche of approximately $1.1 billion. The government hopes to reach a successful agreement at the IMF staff level after the review.
Meanwhile, the State Bank of Pakistan (SBP) is likely to keep its benchmark interest rate at a record 22% for the sixth consecutive monetary policy meeting on Monday amid a persistent threat of inflation.
Most analysts expect a rate cut from the second quarter of this year, however, some of them see scope for a rate cut at next week's review meeting.
According to Tresmark, as the rupee stabilizes, everyone is preparing for a further decline in the value of the US dollar relative to the Pakistani rupee, citing higher inflows during Ramadan and waiting for a positive assessment from the IMF.
“Although it may appear that the direction is bearish, we expect the SBP to buy excess dollar liquidity to keep the market stable,” he said.
Meanwhile, Pakistan's foreign exchange reserves increased slightly by $17 million to $7,913 million as of March 8.
“The line in the sand for the dollar/rupee is around 277/$, which marks the recent low of October 2023. We expect support because there is very little to gain from a stronger rupee and much to lose in the form of exports losses and subsidies. imports, while the current REER also denotes a slightly overvalued rupee,” he said.
“It should be noted that exporters are already being hurt by the sharp rise in energy prices, high cotton prices and high interest rate costs for several years.”
Swap premiums have retreated from their recent highs and reflect the market view of declining interest rates, forward selling interest by exporters and comparatively lower dollar liquidity in the interbank market.
Analysts predict swaps will gradually decline further with an upcoming $1 billion bond redemption next month.
“There is a general misconception that the IMF loves to assert adverse conditions and would be against a rate cut,” Tresmark said.
If there is sound reasoning and the data supports it, there is no reason to keep interest rates high. In the current scenario, although headline inflation appears inflated, it has declined sharply: March inflation is expected to be around 20% and core inflation is also expected to decline to 16%. The real interest rate will be positive going forward.
