Rupee sheds value after three days of strengthening

Written by  Published by:Pakistan Views Friday, 11 December 2015 19:48

KARACHI: The rupee shed 90 paisa against the greenback in the open market, as it closed at Rs105.95 a dollar on Thursday.

It weakened against the dollar in the inter-bank market as well, closing at Rs104.3 compared to Wednesday’s close of Rs103.4.

The weakening of the rupee follows three consecutive days of gaining strength against the dollar. The rupee has seen sharp ups and downs against the dollar, especially in the open market, during the last week or so.

Intermarket Securities Head of International Sales Dr Gohar Rasool said the concerns about the rupee being overvalued became louder when China depreciated its currency last August. While the move was aimed at stimulating its economy, whose growth rate has been slowing down since 2012, other developing countries followed suit, he added.

As a consequence, local investors also started speculating about possible rupee depreciation against the dollar. The price of the dollar jumped in the open market, resulting in the widening of the gap between interbank and open market exchange rates.

This prompted the finance minister and the State Bank of Pakistan (SBP) governor to allegedly ‘direct’ exchange companies last week to cut the dollar rate by Rs2. Subsequently, the value of the rupee has strengthened 1.4% from Rs107.5 a dollar recorded a week ago in the open market.

According to AKD Securities, the premium of the open market rate over the interbank rate – which is currently 1.4% as opposed to the five-year average of 0.53% — is expected to shrink going forward. The premium of the open market rate over the interbank rate will become smaller, AKD Securities believes, due to Ishaq Dar’s recent directive to the participants of the kerb market to work against speculative impacts on the currency.

Another reason for the rising dollar against the rupee, according to Dr Rasool, is the expectation of an interest rate hike by the US Federal Reserve due on December 15. The likely increase in the US federal funds rate will strengthen the dollar against the local currency – something investors have already started factoring in.

“We believe the depreciation (in the rupee’s value) would follow the inflation differential, which is around 4%. Therefore, we expect the dollar to stay around Rs107-Rs108 by the end of calendar year 2016,” Dr Rasool said.

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