Rupee bounces back on rise in reserves

Pakistani currency regained Rs0.19 on Friday and closed at Rs278.21 against the US dollar in the inter-bank market following a surge in the central bank’s foreign exchange reserves to a two-year high above $9 billion.

According to the State Bank of Pakistan’s (SBP) data, the rupee had closed at a two-week low of Rs278.40 against the greenback on Thursday.

With the fresh appreciation, the currency has cumulatively gained 10.38%, or Rs28.89, in the past over eight months compared to the all-time low close at Rs307.10/$ in the first week of September 2023.

The recovery in the local currency led the real effective exchange rate (REER) – the rupee value against a basket of currencies of trading partners – to a six-year high at 104.5 for April compared to 104.1 in the prior month, according to the central bank data.

The higher REER indicates that the rupee has gradually become overweight, which will make imports cheaper and exports uncompetitive.

However, the government has put a control over imports through restrictive measures while exports have remained stable.

Over the past couple of weeks, the rupee has remained stable in the range of Rs278-279/$.
Financial experts anticipate that the currency will stay stable in the short run but they differ on its outlook. Some say it will depreciate as demand for the greenback is likely to pick up for higher import payments. Others say the exchange rate still has room to extend its recovery to Rs235/$.

They point out that the State Bank is buying dollars from the market, creating an additional demand for the foreign currency. The central bank should buy the greenback, but in a manner which can support the rupee.

Reports suggest the central bank has so far bought $6 billion from the currency market to build forex reserves, which have now reached a two-year high above $9 billion.