Rupee touches new record low

Policy rate cut likely to accelerate currency’s slide.


Reuters August 01, 2011

KARACHI:


The rupee fell on Monday to another record low due to strong dollar demand for oil import payments amid soft inflows.


Dealers said that they expect the local unit to stay under pressure for now. The rupee closed at 86.75/80 to the dollar — its weakest ever closing — down from 86.54/60 on Saturday. The previous weakest close for the rupee was 86.56/58 on Wednesday.

“The market was already short of dollars after the sharp rise in demand last week, mainly for oil import payments,” said a dealer at a foreign bank. “There were oil payments worth at least $70 million today (Monday), and dollar inflows were soft, which pushed the rupee further lower,” he said.

Dealers said dollar payments are typically higher in July and August because of stronger oil demand and debt payments. As well as oil payments, the International Monetary Fund’s (IMF) stalled aid programme is also weighing the rupee down.

IMF has criticised the government for its patchy implementation of fiscal reforms and has held back the sixth tranche of an $11.3 billion loan programme since August last year. IMF and Pakistani officials were due to meet late last month, but the meeting was delayed and no new date has been announced.

A cut in the key policy rate by the central bank over the weekend was also likely to accelerate the rupee’s slide, said another dealer at a major local bank. “Cutting interest rates makes the opportunity cost of holding dollars cheaper, hence the weakening of the rupee could accelerate,” he said. “We might get to see the 87-rupee mark faster now.”

The State Bank of Pakistan unexpectedly cut its key policy rate on Saturday by 50 basis points to 13.5% for the next two months, saying it would help spur growth while average inflation remains steady.

Dealers said that increased remittances from Pakistanis working abroad had supported the rupee and was shielding the currency from a sharp fall in recent weeks, but the increased dollar demand over the last week pushed the rupee lower.

According to official data, remittances rose to a record $11.2 billion in the 2010-11 fiscal year, an increase of 25.77% from the previous year. There were no signs of any central bank intervention in the interbank market yet to control the rupee’s slide, dealers said.





Published in The Express Tribune, August 2nd, 2011.

COMMENTS (1)

Waseem N. | 10 years ago | Reply

If it loses any more weight, it will be fit only to make paper planes of. All other economic blocs have consolidated (with adjustment pains), to a common currency ... or at least are considering it. Why isn't SAARC doing the same? Is it really feasible for Pakistan, Bangladesh, Sri Lanka and Nepal to maintain their own Rupees and Rupiahs, when the Indian Rupee remains so strong, and is poised on sheer account of its volume and financial clout, to continue gaining strength? It is time that South Asia, should consider, a common SAARC currency and for once stabilize our regional value equations, so that all industries in each of the eight constituents, benefit from a common currency base. This is something, we should have foreseen and started working on a decade ago. Why do we only wake up, when we are most vulnerable? In a world of weakening US Dollar, and a tenuous Euro, all South Asian currencies, will be subject to a tsunami of financial uncertainties. Stabilizing the financial instruments of exchange across South Asia, is the only imperative. Better safe than sorry.

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