Rupee gains 0.18% against dollar this week boosted by an unexpected rise in foreign exchange reserves
- Inflows from multilateral lenders to support rupee.
- Local currency gains 0.18% against dollar this week.
- Rupee to trade range-bound in January, says Tresmark.
KARACHI: The rupee is expected to remain stable and trade in a narrow range in January driven by hopes of continued inflows from multilateral lenders, however, its future direction would depend on the outcome of the upcoming elections, The News reported Sunday.
The local currency gained 0.18% against the dollar this week boosted by an unexpected rise in foreign exchange reserves due to receipts from multilateral institutions.
On Monday, the rupee closed at 282.37 against the dollar. However, on Friday, it finished at 281.86. The rupee gained 0.18% in this week’s four trading sessions.
“If all goes well politically, we will see rupee range bound for January,” said Tresmark, a financial terminal.
“While for later, it will rely significantly on how/and if the elections transpire. But there is a realisation now that any abnormal devaluation of the currency snowballs into a full-blown avalanche, and this should keep rupee under the lid.”
The forex reserves held by the State Bank of Pakistan (SBP) increased by $852 million to $7.8 billion as of December 22. The surge was due to the receipt of inflows from the World Bank and the Asian Development Bank, increasing the total reserves by $787 million to $12.856 billion.
A rise in foreign exchange reserves would help stabilise the economy, improve the balance of payments, and support the rupee as well. Additionally, the import cover has been improved.
Pakistan will also be able to fulfil its foreign debt obligations on time with the help of its healthy reserves. The increase in forex reserves will also assist in meeting the International Monetary Fund’s (IMF) December targets.
The increase in reserves, along with the expected IMF tranche and other foreign currency inflows, would typically bode well for Pakistan. If multilateral flows keep coming in, our external funding gap will be nonexistent, according to a report.
“But 2023 for Pakistan, was perilously close to bankruptcy, and by borrowing more money, we may have stabilised the ship but not addressed the root causes.” it said.
“Some traction can be seen in terms of tax filers, efforts for privatisation, encouraging FDI, etc., but with fresh elections five weeks ahead, everybody is holding their breath over their continuity,” it added.
Looking back, the only significant action taken by the caretaker government was to contain the currency crises, and as the rupee redeemed from 310s to 280s, the panic subsided, according to the report.
“It wasn’t by letting the rupee find its (whatever that means in Pakistan’s context) true market rate.”
“While the same is true for high-interest rates, it is not practical to cut rates when inflation is a raging problem. SBP is confident that inflation will fall back to 25% next month due to the rebasing effect, but it would seem improbable without strict implementation of the writ of law.”