Rupee makes surprising recovery of Rs6.63

Market talk suggests massive hike in policy rate supported currency

KARACHI:

In a surprise move, the volatile Pakistani currency made a sharp recovery of 2.38%, or Rs6.63, and closed at Rs278.46 against the US dollar in the inter-bank market on Friday.

At a point, the rupee had recovered 4.5%, or Rs12, to Rs273/$. The currency partially gained ground after registering a historical drop of 6.7%, or Rs19, to an all-time low at Rs285/$ a day earlier.

The recovery came following three major developments that took place over the past one day.

First, according to market talk, the currency gained strength after the SBP jacked up its key policy rate by 300 basis points to a record high at 20% on Thursday.

The bank announced its decision to increase the rate after the inter-bank currency market closed in the evening.

Financial experts said that the hike in the rate indirectly supported the rupee as it made bank borrowing significantly expensive, raised the cost of doing business and discouraged imports. Accordingly, the demand for dollars remained sluggish compared to their supply.

Secondly, Finance Minister Ishaq Dar announced that the government was expected to reach the much-delayed staff-level agreement with the IMF next week. The programme is a lifeline for economic survival and averting imminent default.

Thirdly, the central bank announced that the country’s foreign exchange reserves had continued to grow for the third consecutive week. The growth in reserves directly defended the local currency against the greenback.

The reserves improved to an almost six-week high at $3.8 billion after China released a $700 million loan, the SBP reported.

Published in The Express Tribune, March 4^th, 2023.

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