Rupee dips to new low but trims losses before close on suspected SBP intervention

KARACHI: The rupee again fell on Wednesday to hit a new record low of 169.70 to the dollar, but trimmed some losses before close on suspected central bank intervention, dealers said.

In the interbank market, the rupee ended at 169.12 per dollar, a 0.11 percent down from Tuesday’s close of 168.94. This is the rupee’s weakest ever closing.

The rupee touched to record low in the open market, trading at 170.50 in early trade. However, it closed at 169.60 to the dollar, unchanged from the previous close.

The rupee is under pressure on higher dollar demand from importers and thin supplies. The surging trade deficit and the current account imbalances continued to weigh on the local unit.

“The rupee managed to recoup some of the lost ground before the day ended following suspected dollar selling by the SBP (State Bank of Pakistan), which not only supported supplies, but also provided a sentiment boost,” said the currency dealer.

The SBP’s intervention limited a steeper fall, and the dealers expected the rupee to stabilise till resistance at 169 to the dollar not broken.

The SBP adopted a market-based flexible exchange rate system since June 2019 where the exchange rate is determined by demand and supply conditions. The SBP in its statements many times explained that it could intervene in the market only to prevent disorderly market conditions.

Muzammil Aslam, the CEO at Tangent Capital said the pressure on the rupee is due to higher import bill.

“The SBP has discretion to intervene if it’s thought the market is being manipulated," Aslam said. "The SBP works on both sides of the table sometimes mop dollars or sometimes keep market liquid, as the situation warrants.”

Analysts said the limited market intervention by the central bank doesn't go against its own policy of market-determined exchange rate and the International Monetary Fund’s policy as well.

The government's efforts to sustain the economic recovery in the aftermath of the coronavirus-induced lockdown, and achieve growth resulted in an increase in domestic demand, consumption, and investment by businesses.

A higher import bill is putting pressure on the current account balance; monthly CAD is averaging above $1 billion since June. Higher commodity prices have also played a role in increasing the trade deficit.

With oil trading around $70/bbl and record high coal prices, things are unlikely to change on this front. The uncertainty around the outlook for remittance inflows is high as traveling to the Middle East resumes.

“The demand for dollars is higher than supply due to the current account deficit/trade deficit along with the situation in Afghanistan,” said Samiullah Tariq, the head of research at Pak-Kuwait Investment Company.

“Afghanistan was a net contributor of dollars to Pakistan as western aid money was flowing into the country. A lot of demand for goods was being met by Pakistan like milk water etc. With drying up of inflows, the supply of dollars from Afghanistan has also vanished,” Tariq added.

Analysts said the rupee devaluation is likely to fuel imported inflation. The rupee has lost 4 percent against the dollar since the last monetary policy was announced in July.