Rupee stability hinges on IMF programme and policy rate

KARACHI: The rupee is expected to remain stable in the coming week, supported by balanced supply and demand of dollars and optimism about the country’s economic outlook after the International Monetary Fund (IMF) signalled its readiness to work with the new government on a fresh programme and release the final tranche of its current loan programme.

The rupee edged up 0.7 percent against the greenback in the interbank market this week, closing at 279.04 on Friday, compared with 279.26 on Monday.

The IMF said on Friday it was prepared to send a mission for the second review of the $3 billion stand-by arrangement as soon as a new cabinet is formed, and that the completion of the current programme, which expires in April, was on track.

A final payout of $1.1 billion is yet to be released under the current lending facility.

Analysts at Tresmark, a financial data provider, said in a weekly note that forecasting the rupee-dollar exchange rate was not an exact science, but some clues could be found in various indicators “So while there may be great models, forecasting USDPKR is never going to be an accurate job. After all Trust is earned in drops, but lost in buckets.”

Tresmark said the central bank’s strategy to restrict imports and outflows to inflows preserves equilibrium and reduces demand for dollars. The rupee liquidity, till last week, was restricted, encouraging banks to do sell-buy swaps, resulting in generating dollar liquidity and at the same time boosting forward premiums.

The policy rate, despite market expectations of being cut, was maintained to promote rupee demand. “This is why, for the past several weeks, we have maintained our 'range-bound' call on USDPKR. Going forward, we expect status quo on the Rupee, helped by positive news flow from IMF & Moody’s,” it said.

“IMF’s statement that it will support formulating a new programme with the incoming government, and also suggested that the 3rd tranche is on schedule. This news boosted the Rupee, the stock market and also sovereign bonds.”

However, the report worries that the stability of the rupee may be threatened. The real effective exchange rate poses the greatest threat and is predicted to close in February at roughly 104 level. Though it is hardly a cause for concern, there is a slim chance that the IMF may insist on devaluing the rupee. The maturity of $1 billion in Eurobonds next month poses another risk

Pakistan’s forex reserves are gradually declining. Pakistan’s foreign exchange reserves held by the central bank dropped by $54 million to $7.896 billion as of March 1 because of foreign debt repayments.

One other immediate threat stems from the monetary policy, the report said and added that analysts think that a rate cut is imminent in the upcoming monetary policy meeting due on March 18, it may bump the rupee a little higher.

“While the above are real threats, they are being neutralised by optimism about the continuation of the existing IMF programme and entering into a new one shortly after that,” it said.

“It must be borne in mind that no new government would like to spoil their image by devaluing the local currency in the first few months, that’s another reason why the Rupee is expected to stay range-bound.”