Rupee headed for flat close by end of this financial year: analysts

• The rupee closes the week at 279.59 against the dollar.
• Tresmark says rupee depreciation looks unlikely.
• Closing rates at the end of June are likely to be around $310/$.

KARACHI: The rupee is poised to remain flat in the coming days against the dollar and is headed for a steady close by the end of this financial year, The news analysts said on Sunday.

During the outgoing week, the local currency made small gains against the dollar in the interbank foreign exchange market. It closed the week at 279.59.

Meanwhile, analysts said a stable currency was key to curbing imported inflation and boosting business confidence and foreign investment.

“The imported inflation component increases when the rupee depreciates,” financial terminal Tresmark said in a weekly note. “A policy of pegging to a stronger local currency has been adopted to avoid this.”

It should be clear by now that inflation is the nation’s biggest party spoiler. Not only is it not going away, but every other policy aims to smooth it out. Most economies prioritize inflation over economic growth, which is a global issue.

In 2023, Pakistan saw its highest inflation and its currency hit all-time lows until a $3 billion International Monetary Fund (IMF) bailout saved the country from an impending sovereign default in July.

Consumer price index inflation in the country rose to 29.7% in December from 29.2% in November.

“The rupee/dollar rate was 286 at the beginning of the financial year. A 7–10% annual depreciation is typical, based on historical trends, supporting exporters and keeping the real real exchange rate close to parity,” Tresmark said.

“This would mean closing rates at the end of June would be around $310/$. As of today, the rupee is actually stronger by about 2%, and devaluation looks unlikely,” he added.

“The new new government is unlikely to rock the boat unless inflation comes down significantly. Hence, the rupee is headed for a soft close by the end of June 24.”

Exporters, now competing fiercely with global manufacturers and also domestic conditions such as escalating cotton prices, energy and labor costs, are taking the extraordinary risk of selling dollars forward to offset their sales and to give competitive prices.

There also appears to be a concerted effort to keep swap premiums high amid falling interest rates to support futures selling, Tresmark noted.

State Bank of Pakistan’s (SBP) total foreign exchange positions fell to $3.2 billion from $4.5 billion in June 2023.

The stable currency has generated higher transaction numbers, business confidence, a strong stock market and an inflow of portfolio investment. Monthly inflows are about $46 million with about $19 million coming from buying interest-bearing market notes from foreign investors, he added.

In a poll conducted by Tresmark, 83% of participants expected no change in interest rates at the upcoming monetary policy review meeting on Monday. The majority believe there will be no rate cut for another two months. While the SBP has projected inflation to come down sharply, revisions in energy and fuel prices will keep inflation high.