Exchange rate stability hinges on SBP's rate move

Rupee is likely to track back on the stability path with the central bank likely to act dovish in the upcoming monetary policy announcement scheduled next week amid easing inflationary pressure, analysts said. "Exchange rate movement will depend on the stock market behaviour and monetary policy announcement scheduled for next week," an analyst said.

Global stocks and local equity market have been jolted during the ongoing week after coronavirus spread on faster pace and oil price war between Saudi Arabia and Russia. The local currency followed the market sentiments and shed more than three percent against US dollar during the week.

The primary reason for rupee decline was outflow of hot money from the local debt market. The State Bank of Pakistan's latest (SBP) data showed that foreign investors divested $824 million from treasury bills and Pakistan Investment Bonds (PIBs) during the 12-day period of the ongoing month. The offloading was equal to 72 percent of the total divestment from treasury bills and PIBs between July 1, 2019 and March 12, 2020.

The government attracted $3.4 billion of investments into short-term bills, having maturity of up to one year, during the period since it allowed foreign investments in the bonds to garner support for the external account sector. The SBP is scheduled to issue monetary policy statement for next two months on March 17, 2020. Analysts are expecting 50 to 100 basis points of rate cut after a series of increases since January 2018. Inflation eased to 12.4 percent in February from 14.6 percent in January, creating ground for a much-needed rate cut.

The lower oil import bill reduces the demand for dollars and would help in stabilising the exchange rate, analysts said. Tussle between Saudi Arabia and Russia on production brought down the world oil prices. Since Pakistan is net importer of petroleum products it is hoped that the local prices might see sizeable cut.

Experts believed that the reduction in prices of oil products would also ease inflationary pressure in addition to create room for the central bank to cut the policy rate. However, there is concern that a substantial cut in policy rate might discourage foreign investors of the domestic debt market.

Analysts, however, said pressure on the hot money is likely to ease during the next week and the local unit might also recover some losses after the central bank landed to check speculative trading and that caused shortage of dollars.

The global stock market, especially bourses of the UK and the US, compelled the panicky investors to consolidate their funds and they opted to take out investment from debt securities. During the ongoing week, the stock markets of these two economies witnessed massive fall. Experts believed that the outflow of funds from local debt market was imminent in such a scenario. However, the global stocks as well as local equity market ended the week in the green, rekindling recovery hope during next week.