The adult in the room

With interest rates creeping up and a persistent weakening of the rupee, the authorities are struggling to manage market sentiments. Unfortunately, this is not the end, and the drip-drip of bad news will continue in December. On December 14th, the SBP is likely to announce another hike in interest rates (we project a further 150 bps increase). On December 20th or 21st, the SBP will release its November BoP data where the current account deficit (CAD) for the month could be as high as $2.2 to 2.6 billion, and at some point, December’s inflation data will also be released, which could be above 12.5 % YoY (year-on year).  

In response, Shaukat Tarin has blamed banks for driving interest rates up, claimed that demand for dollars from Afghanistan is weakening the rupee, and said that the rupee should be at Rs168/$.  He also warned that the authorities had formulated a policy response that will hurt those people who are speculating against the rupee.  These are fighting words, but they are unlikely to change market sentiments or arrest the trajectory of both the money and foreign exchange markets.  The fundamentals are siding with the markets.