The value of the US dollar against the rupee touched all time , reaching approximately 167/167.5 in the intrabank during early trading on Thursday.
The crucial barrier of 160.00 was being tested last week. On Monday it was broken. Next level to watch was 165 that the central bank was not able to protect as it was broken on Wednesday. With the market currently at 166/167, next barrier to watch is 170.00. Analysts attribute much of the depreciation to the 225 bps cut in the discount rate within a week. Some believe that SBP will try to contain the parity between 165-168, therefore some rupee appreciation is being expected by currency markets.
The analysts have also attributed the depreciating of the Pakistan rupee to pulling of hot money by foreign investors from the government bills.
Total gross divestment during March 2020 has just reached $1.501 billion, according to data released by the SBP, in an expected trend of foreign outflows leaving the country due to the COVID-19 outbreak.
Foreign investors divested $95 million of treasury bills (T-bills) on March 24, as per the Special Convertible Rupee Account (SCRA), which tracks inflows and outflows from foreign countries.
This amount was enough to tip over total gross divestment over the $1.5 billion mark, which on March 13 stood at $1.406 billion.
The net investment in T-bills from July 2019 to date now amounts to $1.598 billion. At the rate of foreign outflows leaving the country, the net investment looks certain to fall to, or even further, than the December 2019 figure of $1.450 billion.
The month of March has seen a significant amount of money leave the country.
In the monetary policy announcement on March 17 at the State Bank, Dr Reza Baqir said globally, because of coronavirus, there has been a general ‘flight to safety’, that was not linked to whether the SBP significantly changed its policy rate or not.
The SBP cut the policy rate by 75 basis points on March 17, from 13.25pc to 12.5pc, and then by an additional 150 basis points to 11pc on March 24.
According to Sami Tariq, Head of Research and business development at Arif Habib Limited, “This should be temporary. As commodity prices are down, yield differential will attract investments again. However, risk aversion at present is resulting in appreciation of the dollar against other currencies.”
The recent slump in the value of the rupee is attributed to the slash in the policy rate.
On Wednesday, the State Bank of Pakistan (SBP) cut the policy rate by 150 basis points, from 12.5pc to 11pc. This follows a policy cut from just last Tuesday, when the SBP cut the policy rate from 13.25pc to 12pc. The policy rate cut can be seen as a reason for hot money leaving the country. The SBP maintains that foriegn money outflows are due to a general ‘flight to safety’. Many developed countries are divesting from emerging markets due to the COVID-19 crisis, in order to have liquidity.
While stock markets are falling drastically, global economic fears surrounding the COVID-19 crisis have resulted in liquidity selling. Thereby, capital flight is a common sight as sovereign debt is liquidated.
On 17 March, at the MPC meeting, SBP Governor Reza Baqir clarified the exchange rate policy, saying the central bank will intervene whenever there is volatility, but it will not try and actively suppress demand and supply in order to determine the direction of dollar rates.
The federal government has also announced a Rs1.2 trillion stimulus package amid lockdown across the country. Around Rs200 billion has been allocated for labourers and Rs100 billion tax refunds will go to exporters and industry.
According to the AKD securities report titled ‘PM Package – No antidote for uncertainty’, “On the flip side, the aggressive easing at this stage could further accelerate the hot money outflows – which nevertheless are likely to continue amidst global risk aversion – putting more pressure on rupee in the near term. Looking ahead, we do not rule out further monetary action from the SBP considering extraordinary times.”
