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October 25, 2020

Rupee likely to gain further

Business

October 25, 2020

KARACHI: The rupee is set to make more gains in the coming week due to decreased demand for the greenback from routine buyers and increased inflows of the dollars, dealers said.

Moreover, the foreign exchange market is likely to react positively to the Financial Action Task Force’s decision of keeping Pakistan on the grey list, as it could pave the way for closer engagement with the International Monetary Fund.

The FATF’s statement to acknowledge progress made by the country on action plans could be positive for the local currency.

“We expect the rupee to strengthen further in the coming days. We see increased inflows of the dollars from multilateral sources, exports and remittances. On the demand side, there is muted demand from the oil sector and other importers,” a dealer with a leading commercial bank said.

“The improvement in the real effective exchange rate (REER) and the dollar selling by exporters in anticipation of further appreciation by the domestic unit also expected to give the rupee support.”

Dealers expect the rupee to trade below 161 against the dollar next week.

The rupee rose Rs1.01 to Rs161.37/dollar in the interbank market during the outgoing week.

Currency dealers were of the view that during the last day of the outgoing week, the dollar supplies were good and exceeded the importers’ demand, so the rupee appreciated against the greenback.

The currency was also boosted by the news pertaining to the approval of $304 billion financing from the World Bank’s board of executive directors for the Punjab Resource Improvement and Digital Effectiveness Programme.

The current account posted a surplus of $73 million in September, taking a surplus of $792 million in the first quarter of this fiscal year.

Foreign exchange reserves held by the country increased $287 million to $19.301 billion as of October 16 after a three-week falling streak. These upbeat data helped the rupee boost its value against the dollar.

Dealers said the improvement in both the country’s foreign exchange reserves and in the external account has led to the rise in real effective exchange rate to 91.69 (August 2020 number).

These numbers indicate undervaluation of the rupee vis-à-vis its major trading partners, but paving the way for further strengthening of the local currency.

However, there are two factors to limit dependence on this benchmark only. One is external and fiscal sustainability and the other is the meager 11 percent US dollar weightage in the index.

The REER is likely to remain important for traders as long as the regulator maintains its relevance.

Dealers said though the FATF’s statement neither has shocks nor surprises, it has given a short four-month window to Islamabad to redress the remaining six points of the 27 related to anti-money laundering and terror financing deficiencies.