Rupee falls despite IMF deal

Pakistani currency came under renewed pressure, as it dropped 0.55% (or Rs1.15) on a day-to-day basis to a two-week low at Rs210.95 against the US dollar in the inter-bank market on Friday following the country’s low foreign exchange reserves fell further a day ago. The rupee had improved 0.14% (or Rs0.30) to Rs209.80 after Pakistan reached a staff-level agreement with the International Monetary Fund (IMF) for the revival of $6 billion loan programme on Thursday.

While the much-awaited IMF agreement failed to help the rupee advance its recovery, the staff-level agreement helped cool down high yields (rate of return) on three-month to 10-year government papers by 30-70 basis points in the past two days in secondary markets. The rupee snapped the recovery drive in the middle following the central bank reported on Thursday a fresh drop of $99 million in forex reserves to $9.72 billion in the week ended July 7, 2022, an expert said. There was import payment pressure, while the IMF would release a loan tranche of $1.2 billion sometime in August after its Executive Board gives the final approval.

The rupee may remain under pressure for some time until foreign inflows start reaching the country. On the other hand, however, “(bonds’) yields have started falling since Pakistan reached the staff-level agreement with the IMF on July 13, 2022,” Topline Research’s analyst Umair Naseer said in a commentary. “Along with the staff-level agreement, a sharp reduction in international oil prices and improved liquidity in the domestic banking system has resulted in lower bond yields,” he said.

Data suggests the yield on three-month T-bills dropped 48 basis points in the past two days to 15% in the secondary market on Friday. It shrank 33 basis points for the six-month T-bills to 15.38% while the yield fell 27 basis points to 15.59% on the 12-month T-bills. Similarly, the yields on three, five and 10-year Pakistan Investment Bonds (PIBs) were down 60-70 basis points to 13.33%, 12.80% and 12.58% respectively in the past two days.

“Realisation of IMF and other foreign flows, global commodity prices and the overall economic and political situation would remain the key to the outlook for bonds and treasury yields,” he said. Excess liquidity in the system also helped in bringing down the overall yields in the market. This is evident from access to the SBP repo facility by banks, which placed funds of Rs198 billion with the SBP on July 14 and Rs296 billion on July 13 at a repo rate (floor rate) of 14%. It is also reflected by the heavy participation of Rs725 billion in Thursday’s PIB auction by banks, of which the government only accepted bids of Rs145 billion.

“Yields in yesterday’s (Thursday’s) auction also remained in check and the government did not accept bids for 10-year bonds, signalling the market that it is not willing to accept high rates for long-term bonds.” Though inflation is anticipated to remain elevated at around 18% on average in FY23, the recent reduction in petrol and diesel prices and expectations of further decline due to lower international oil prices could provide some relief and help cut yields.