Rupee to remain stable if IMF talks conclude positively

• Rupee gains 0.11% against US dollar this week.
• Tresmark expects rupee to remain range-bound.
• Expected to test 278 level if there is no rate cut. 

KARACHI: The rupee's stability against the US dollar in the coming week remains hinged on the International Monetary Fund's (IMF) review of the $3 billion stand-by arrangement and interest rates, The News reported Sunday. 

The local currency is expected to remain stable if the IMF review concludes positively and the interest rates are maintained, said analysts. 

The rupee gained slightly against the greenback in the interbank market this week as it closed at 278.74 on Friday. In the week's five trading sessions, there was a 0.11% increase in the value of the local unit.

“We expect the rupee to remain range-bound if there are no surprises on the IMF (International Monetary Fund) front. If there is a rate cut, it might wobble but then fall back in line. If there is no rate cut, we might see it test the 278 level,” said Tresmark in a weekly note on Saturday.

The four-day review of the IMF's loan programme is underway since Thursday with the current SBA set to expire in April. If the talks end successfully, then Pakistan will receive a final tranche of approximately $1.1 billion. The government hopes for a successful IMF staff-level agreement after the review.

Meanwhile, the State Bank of Pakistan (SBP) will likely keep its benchmark interest rate at a record 22% for the sixth consecutive policy meeting on Monday amid persistent threat of inflation. 

Most analysts anticipate a rate cut starting in the second quarter of this year, however, some of them see room for a rate cut at next week’s review meeting.

According to Tresmark, while the rupee stabilises, everyone is preparing for a further decline in the value of the US dollar relative to the Pakistani rupee, citing stronger Ramadan inflows and hoping for a positive IMF appraisal.

“Although it may appear that the direction is down, we expect the SBP to buy the excess dollar liquidity to keep the market stable,” it said.

Meanwhile, Pakistan's foreign exchange reserves slightly inched up by $17 million to $7.913 billion as of March 8.

“The line in the sand for dollar/rupee is around 277/$, which marks the recent low of October 2023. We expect support because there is very little to gain by a stronger rupee and much to lose by way of lost exports and subsidised imports, whereas the current REER also denotes a marginally overvalued Rupee,” it said.

“It must be kept in mind that exporters are already being hurt by the steep rise in energy prices, high cotton prices, and multi-year high interest rate costs.”

Swap premiums have retreated from their recent highs and reflect the market's view of declining interest rates, forward selling interest from exporters, and comparatively lesser dollar liquidity in the interbank market.

Analysts predict that the swaps will gradually go down further with an upcoming bond repayment of $1 billion next month

“There is a general misconception that the IMF loves asserting adverse conditions and that they would be against a rate cut,” Tresmark said.

If there is sound reasoning and if data supports that, there is no reason to keep interest rates elevated. In the present scenario, although headline inflation appears inflated, it has sharply decreased, with March inflation expected to be around 20%, and core inflation also expected to subside to 16%. The real interest rate will be positive on a forward-looking basis.