Rupee may stay volatile

The local currency market saw highly volatile trade during the outgoing week, where rupee weakened by 4.58 percent against the dollar in the interbank market, while it faced a depreciation of five percent in the open market. Rupee tumbled to record lows, hitting 147.87 in the interbank market and 151 in the kerb market.

This fresh plunge in intraday trade on Friday touched a historic low at 149 per dollar.

It appeared that the central bank pulled back its support and did not defend the rupee from free fall ahead of the International Monetary Fund (IMF) $6 billion bailout deal, which put the currency under immense pressure.

In the wake of turmoil that engulfed the rupee during the outgoing week, the State Bank of Pakistan was not seen intervening in the market with dollar sales to rescue the currency. The SBP also shunned the bankers and traders, as the sharp weakness in the domestic currency was not reflective of purely market-driven foreign currency trading as per the IMF demand.

Many bankers believe the battered rupee would take another bruising in the coming weeks. The SBP has agreed with the IMF to devalue the currency by 155 till June, they believe.

“We expect more volatility in the coming days, as there is a panic in the market regarding future economic strategy of the government, and also the upcoming budget which would direct dollar valuation. In our view, the dollar will settle around 150 plus in the coming weeks,” a banker said. However, the central bank in its statement released on Thursday said the interbank market saw significant currency depreciation due to demand and supply conditions.

Analysts said the weakening currency showed the Fund’s condition for a market-determined exchange rate, which would allow limited support by the SBP.

Forex Association of Pakistan President Malik Bostan said the open market remained under intense demand pressure, while dollars were not available to meet the buyers’ demand.

“People are reluctant to sell dollars and hold positions in anticipation of further devaluation in the interbank market,” he added.

The rupee’s record lows were also heightening speculation that the SBP might hike the interest rates on May 20 more aggressively than expected earlier. “Our poll in this regard expects 100 bps hike by more than 60 percent participant in the poll. We expect hike in policy rate would be due to inflationary pressures arising from utility rate hikes, rupee devaluation and budgetary measures. This is to note that if MPC hike policy rate this time then this will be the sixth hike in FY19,” Tresmark Research said.