Interest rate hike to keep rupee stable next week

• Rupee ended at 283.79 against dollar on Friday. 
• Increased remittances to also keep local unit stable. 
• SBP expected to raise policy rate by 100-200 basis points.

KARACHI: Rupee is likely to remain stable against the US dollar next week owing to the anticipation of further interest rate hikes, The News reported Sunday. 

Moreover, other factors that are expected to keep the currency stabilised include increased remittances, and the State Bank of Pakistan's (SBP) move to discourage export proceeds from being delayed.

The local currency traded in the range of 283.50-283.80 against the greenback in the interbank market during the outgoing week. It closed at 283.58 on Monday, but on Friday it lost ground and ended at 283.79 to the dollar.

“Although there will still be a demand for dollars from importers, this demand will probably be offset by inflows from remittances. The supplies are improving as a result of remittances sent by Pakistanis living abroad during the holy month of Ramadan,” said a currency dealer.

That factor would keep the rupee stable in the coming days, he added.

Market players await the central bank's monetary policy decision, which will be announced on Tuesday.

The SBP is expected to raise the policy rate by 100-200 basis points as inflation is spiralling out of control. Consumer price inflation in Pakistan jumped to a record 35.37% in March from a year earlier.

Last month, the central bank hiked the policy rate by 300 basis points to 20%.

“While traders had factored in delays in the IMF (International Monetary Fund) programme and deteriorating political situation to further weakening of the rupee, an SBP circular that discourages delays in export proceeds and a 1-month window (till April 30th) of realising proceeds without any late penalties, has led to a counter view that the rupee will appreciate,” Tresmark said in a weekly note.

An influx of higher remittances and a potential rate hike next week would further strengthen the rupee narrative, the note stated.

“Without speculating on the fate of the IMF program, most traders are bullish on the rupee but stated that the SBP will continue its dollar buying spree to bolster its reserves and that will keep USD-PKR range bound.”

The country’s foreign exchange reserves held by the central bank dropped by $354 million or 7.7% to $4.24 billion in the week ending March 24. The drop in the reserves was due to external debt repayment.

A key milestone of rollover of China’s $2 billion deposit seems to have been cleared — as claimed by Finance Minister Ishaq Dar — which may lead to a quicker staff-level agreement with the Washington-based lender.

Traders are of the opinion that the IMF's staff-level agreement is now closer to completion, citing the following reasons other than China rollover and assurances by friendly countries.

The increase in the treasury bill auction cut-off yields suggests a policy rate hike on April 4, an unwinding of the SBP SWAP book which had swelled from $4.4 billion to $5.7 billion in the last year.

Currently, SBP is reducing this by doing sell-buy swaps, and probably on the express advice of IMF.

“The IMF Board is next set to meet up in the 3rd week of April, which could be a potential (albeit ambitious) target date. But first, a staff-level agreement needs to be signed,” it noted.