Rupee likely to recover amid increase in key policy rate

KARACHI: The rupee is likely to make some recovery against the dollar next week due to significant rise in the key policy rate.

The Monetary Policy Committee (MPC) in its meeting on November 19, 2019 decided to increase the key policy rate by 150 basis points to 8.75 per cent. The decision was unexpected for the market but, according to the central bank, the tightening of policy rate may ease pressure on the local currency and arrest inflation.

The State Bank of Pakistan (SBP) in the last few weeks has taken a number of measures to discourage the demand for the dollar for external payments. However, the efforts of the central bank resulted in a failure, as after taking some breath the deterioration in the rupee value started again.

During the outgoing week, the exchange rate witnessed a mixed movement. During the first three sessions, the rupee makes a comeback. But in the last two sessions the dollar rebounds. The exchange rate ended the week at Rs175.23 against the greenback in the interbank foreign exchange market.

The outgoing week opened with positive sentiments, as the central bank had taken effective stance by increasing the Cash Reserve Requirement (CRR) to 6 per cent from 5 per cent. The SBP announced this measure on November 12, 2021, which was the day when the local currency hit the historic low of Rs175.73 against the dollar in the interbank foreign exchange market.

Following the announcement of enhancing the CRR, the exchange rate witnessed recovery in the rupee value for the next three consecutive sessions. The rupee recovered the value to Rs173.76 against the dollar on November 17, 2021.

A statement by Adviser to the Prime Minister on Finance and Revenue Shaukat Tarin resulted in a blow to the local currency. Tarin had said that the International Monetary Fund (IMF) has demanded ‘prior actions’ for the approval of the next tranche under $6 billion Extended Fund Facility.

He also said he could not give a timeline for the release of the next tranche, despite the settlement of all the issues with the IMF.

After this statement, the dollar jumped to Rs175.23 to the dollar in the next two sessions to close the week. The SBP in its latest monetary policy statement said: “The rupee has depreciated by a further 3.4 per cent since the last MPC meeting. The US dollar also appreciated against [the] most emerging market currencies since May, as expectations of tapering by the Federal Reserve have been brought forward. However, the fall in the value of the rupee since May has been comparatively large.”

“As other adjustment tools normalize, including interest rates and fiscal policy, pressures on the rupee should abate.”

Market analysts has been reported saying the tight monetary stance may help ease the pressure on the local unit but it would be temporary till the foreign inflows are not realized. The realization of inflows under the IMF tranche and pledge support by the Saudi government for $3 billion may help the rupee stable for a longer period.

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