–PKR to lose further ground in case of non-intervention by SBP
–Analysts relate bouncing back to ‘inflows’, intervention by SBP
KARACHI: After suffering a massive loss in early trade on Friday morning, the Pakistani Rupee made a sharp recovery against the US dollar in the interbank market, to close at Rs166.5, following the State Bank of Pakistan (SBP) alleged intervention.
The analysts believe that the SBP intervened and injected dollars in the market to stabilise the PKR that was being traded at Rs170 against the US dollar: its lowest since June 2019 in early trade.
However, a source working in the money markets denied that there was an intervention by the central bank and linked the bouncing back of the rupee to the inflow of dollars.
Market analysts, on the other hand, believe that the rupee recovered due to both inflows and intervention.
While the SBP has been following a floating exchange rate, it intervenes during disorderly market conditions. This means that the State Bank can intervene when there is no news or event that triggers a sudden movement.
Naushad Chamdia, CEO at SCS Trade said the depreciation was mainly due to mismatch between import payment pressure and exporters holding proceeds.
“This depreciation will indirectly sway sentiments at the stock market. SBP regulations regarding relief on loan repayments, aging & cut in interest rates would be reversed if the PKR continues to depreciate. Going forward, we expect the rupee to rebound since the SBP is intervening,” he added.
Analysts expect that the currency is likely to be under pressure considering the outflow of dollars due to the liquidity concerns of foreign investors. Considering how gold, a safe haven, has not managed to save itself from this liquidity selling spree, the rupee is likely to lose unless an intervention takes place.
Why would the SBP intervene?
The International Monetary Fund (IMF) has allowed the SBP to intervene in the exchange rate during disorderly market conditions
While there has been no such news that would trigger a loss of confidence in the rupee, the prime reason behind this change is foreigners liquidating their positions in T-bills considering the global demand for liquidity.
This sell-off is primarily due to the safe-haven status the US dollar has made for itself amid the COVID-19 crisis.
Commenting on disorderly market conditions, the state bank governor said the bank looked at three things when intervening. One, the movement of the trade; the bid/ask spread and the distance, with the greater distance, the more the uncertainty; and the market supply and demand.
On Wednesday, the State Bank of Pakistan (SBP) cut the policy rate by 150 basis points, from 12.5pc to 11pc. This follows a policy cut from just last Tuesday, where the SBP cut the policy rate from 13.25pc to 12pc.
The policy rate cut can be seen as a reason for hot money leaving the country leading to the PKR depreciation.