Rupee racks up biggest gain in two years on SBP policy move

KARACHI: Rupee on Friday snapped a 17-day losing streak to pull off the biggest single-day gain versus dollar after the central bank’s massive monetary tightening, while the top court decision to restore the legislature sparked hopes political tensions were easing.

In the interbank market, the currency strengthened Rs3.5 or 1.90 percent against the greenback. The rupee was quoted at 184.68 at the end of the trade. It closed at 188.18 on Thursday. The currency saw the biggest gain on a day-to-day basis in two years that lifted it off record lows.

The rupee appreciated 1.31 percent in the open market trade to close at 188/dollar, compared with the previous close of 190.50.

The investors and the markets were hopeful the dismissal of the National Assembly speaker’s ruling on the no-trust motion against the Prime Minister Imran Khan by the Supreme Court would somewhat defog the political situation, and improve the country’s economic outlook, according to dealers.

The parliament will convene on Saturday to vote on removing Imran Khan as Prime Minister. Since the opposition has a simple majority it is expected to vote in favour of the no-confidence motion.

State Bank of Pakistan hiked the policy rate by 250 basis points to 12.25 percent to curb inflation and improve external sector stability.

The SBP also took actions to ease pressures on inflation, rupee, and the current account. It also imposed 100 percent cash margins on 177 import items and increased the interest rate on the export refinance scheme.

Analysts said the SBP’s jacking up rates by big margins will soothe investor nerves and boost confidence in the country’s currency and the economy as well.

Abdul Rehman Siddiqui at BMA Capital Management Limited in a client note said the SBP raised rates taking cue from the macroeconomic situation particularly persistent double-digit inflation, worsening external account, rising domestic and international bond yields and weakening rupee.

“We see this [rate hike] as a timely move by the SBP, which going forward, will result in softer CPI readings, stable exchange rate and moderation of local demand,” Siddiqui added.

The SBP, in its monetary policy statement said, heightened domestic political uncertainty contributed to a 5 percent depreciation in the rupee and a sharp rise in domestic secondary market yields as well as Pakistan’s Eurobond yields and CDS spreads since last meeting. The rupee had been under immense pressure due to postponement of the IMF loan programme, Chinese debt repayment and rising current account deficit. The SBP’s forex reserves dropped to $11.139 billion in the week that ended on April 01. The reserves were at a record high of $20 billion in August 2021.

The initial jubilation over the Supreme Court move is waning as investors are skeptical about whether the new government can manage to tackle the issues the economy is facing.

“We believe a key sentiment driver for the market will be immediate policy formation by the new government. Primary focus should be on exports and stability in the external position,” said a report from Arif Habib Limited.

“For this reason, the new government should have dedicated targets for exports. The IT sector, while already thriving, should further be explored. Whereas value added textile exports should also be encouraged,” it said.

“Moreover, we believe the currency should be allowed to remain at its market determined level, and take any pressure from the external account,” it added.

Since January to date, the Pak rupee has depreciated by 6.2 percent against the USD whereas real effective exchange rate as per the latest SBP report hovers at 97.91 as of February. In addition, initiatives for overseas Pakistanis such as Roshan Digital Account (RDA) should be prioritised (inflows of $3.9 billion as of March) and proper channel flows for remittances should be maintained to keep foreign reserves afloat, according to the report.