Rupee devalues by 2.6pc against dollar in single day

Lahore –  The rupee drifted lower by 2.6 percent versus dollar in the interbank market on Friday, declining by Rs5 in a single day to Rs110.5, with no major change in the open market mainly due to pressure of payments on the external account, the dealers said.

They said the rupee-US dollar exchange rate, later in the evening started stabilising and closed at Rs105.8 to the greenback after deteriorating unexpectedly in the interbank market.

The pressure of payments on the external account is said to be the reason behind the rise in dollar’s value. However, in the open market, dollar is trading at Rs109, according to Forex market dealers.

They said that the dollar is going up due to Pakistan’s high debt burden, adding that the hike in dollar rate will also increase rate of imported items in the country.

During the last 10 years, Pak Rupee has devalued annually by 5 percent.

Last week, the rupee traded firm against the dollar but fluctuated against the euro in the interbank market. In the open market, however, the rupee remained under slight pressure against the dollar.

An official of State Bank of Pakistan said that the central bank is monitoring the situation as trading is currently underway, hoping that the dollar rate will stabilise in a short period and fluctuation in local currency will end very soon.

Financial market expert at Topline Fahad Qasim observed that there was a brief episode in early July where Pak Rupee fell to Rs108.20 on July 5 (down 3 percent from previous day’s close of 104.90) but subsequently came back up to Rs105.25 on July 10.

It remains to be seen this time around whether this is temporary or whether this movement in Pak Rupee sustains. He said devaluation is long overdue as the Pak Rupee has been relatively stable since August 2015.

Further, Pakistan’s external account has deteriorated as of late. During FY17, Pakistan posted current account deficit of $12.2 billion (4 percent of GDP) as compared to $2.6 billion (0.9 percent of GDP) in FY16.

For the period Jul-Oct 2017, CAD increased to $5.0 billion (1.6 percent of GDP) compared to $2.2 billion (0.7 percent of GDP) last year.

He said that local equity markets have taken this development positively with the market up by 1.2 percent so far. This is largely positive for Oil & Gas Exploration, Power (IPP’s) and Textiles. He expected rupee devaluation of around 6 percent for FY18.

Experts said that devaluation came a day after a United Nations report warned that the government’s policy of keeping the exchange rate stable by intervening in the foreign exchange market may become unsustainable if the US dollar appreciates against most major currencies in global markets.

The stable exchange rate may be encouraging for some investors and traders, but the report warned that it is draining precious foreign exchange reserves.

Syed Atif Zafar, analyst at JS Research stated that there is a significant ambiguity in the market with respect to the outlook of rupee/USD rate. He was of the view that the movement in Rupee/USD has been triggered by the latest decline in foreign exchange reserves (excluding bond issues).

As per SBP latest data, total foreign exchange reserves have declined to $18.74b as at Nov 30, 2017 from $19.69b as at Nov 24, 2017 with reserves held by SBP declining to $12.66b from $13.55b during the same period.

While details are not clear for the decline, it is speculated that repayment of short-term debts taken to support foreign exchange reserves with Eurobond and Sukuk proceeds forthcoming has led to such a fall.

It is to be noted that in Jul-2017, Rupee had declined by 3.1pc to 108.095, but the government acted swiftly and Rupee/USD reverted back to 105.5 one day later.

Experts highlighted depreciation of the currency as a positive for the equity market, as over 25pc of market capitalisation directly benefits from Rupee depreciation. Sugar sector is also likely to benefit with exports of surplus stock expected in the near-term. Banks are also indirect beneficiary of PKR depreciation.

On the other hand, sectors like Autos, Pharmaceuticals, Cements, OMCs (due to outstanding L/Cs) and select Chemicals are likely to be adversely affected.

Staff Reporter from Karachi adds: State Bank of Pakistan said today, the PKR-USD exchange rate in the interbank market closed at Rs107 per USD. During the day, PKR depicted high and low of Rs109.50 and Rs105.55 respectively, said a central press release on Friday.

Almost half way into the current fiscal year, Pakistan’s economy is well positioned to achieve the real GDP growth target of 6 percent in 2017-18. This positive outlook is supported by a broad-based 8.4pc growth in large scale manufacturing during the first quarter of the year, and encouraging assessment of major crops, while services are likely to benefit from the positive spillovers of the growing commodity sector. Strong growth in private sector credit, particularly in fixed investment loans, also reflects the dynamism in the real economic activity.

Moreover, inflation continues to remain low and stable, and stood at 3.6 percent during the first five months of the year.

On external front, exports recorded a double-digit growth during Jul-Oct FY18; Foreign Direct Investment reached a nine-year high; and workers’ remittances posted a modest growth.  However, the continuation of high growth in imports led to a widening of current account deficit, and consequently to depletion in the country’s foreign exchange reserves.

These pressures have persisted leading to the adjustment in inter-bank exchange rate. This movement in the exchange rate is based on demand and supply of foreign exchange in the interbank market.

SBP is of the view that this market-driven adjustment in the exchange rate will contain the imbalance in the external account and sustain higher growth trajectory.

The exchange rate will continue to reflect the demand and supply conditions; and SBP stands ready to intervene, in case speculative and/or momentary pressures emerge, for smooth functioning of the foreign exchange markets, the statement concluded.


Rupee devalues by 2.6pc against dollar in single day




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