Monetary policy announcement may end rupee volatility

KARACHI: The monetary policy announcement scheduled for next week may end the volatility in the rupee value.

The State Bank of Pakistan (SBP) is scheduled to announce the monetary policy statement on December 14, 2021. The Monetary Policy Committee will take all the current economic indicators into consideration, while making the decision. One of the priority of the committee may be to support the local currency, which deteriorated immensely.

The rupee ended the week with the all-time low of Rs177.71 against the greenback at the interbank foreign exchange market on December 10, 2021. The rupee lost 94 paisas against the dollar during the outgoing week. However, the local currency witnessed significant decline during the current fiscal year, as it lost Rs20.71, or 12.8 per cent, compared with the exchange rate of Rs157.54 on June 30, 2021 against the closing of Rs177.71 on December 10, 2021.

Previously, the central bank on November 19, 2021 surprisingly increased the key policy rate by 150 basis points to 8.75 per cent.

One of the objectives was to curtail domestic demand and discourage import payments to support the rupee.

Despite the measure, the rupee fell Rs2.47 against the dollar from Rs175.24 on November 19, 2021 to Rs177.71 on December 10, 2021.

Market analysts believe the central bank may be harsher in the upcoming policy and are expecting a further 100 to 150 basis points increase in the key policy rate.

The analysts said the dollar demand remained high and it will further depress the rupee value in the coming days.

Surprisingly, the deposit of $3 billion by the Saudi Fund for Development (SDF) with the State Bank of Pakistan (SBP) helped increase the foreign exchange reserves but failed to support the rupee.

The Saudi Fund last week placed the amount with the Pakistani central bank, which helped increase the official foreign exchange reserves of the State Bank of Pakistan.

The official reserves of the central bank increased to $18.65 billion by the week ended December 3, 2021, compared with $16.01 billion a week ago, the SBP reported.

Meanwhile, the large import bill remained a big challenge for the rupee stability. The import bill sharply increased 69.17 per cent to $32.93 billion during the first five months (July-November) 2021/22, compared with $19.47 billion in the same period of the last fiscal year.

The rising import bill widened the trade deficit massively. The trade deficit ballooned 112 per cent to $20.59 billion during the first five months of the current fiscal year, compared with the deficit of $9.72 billion.

Similarly, the foreign inflows are not sufficient to meet the demand for external payments.

The exports of the country recorded 27 per cent growth to $12.34 billion during the first five months of the current fiscal year, compared with $9.74 billion in the corresponding period of the last fiscal year.

Meanwhile, the inflows of foreign remittances sent by the overseas Pakistani workers recorded a decline in October 2021, compared with the inflows in the preceding month. The inflows of remittances were $2.517 billion in October 2021, compared with the inflows of $2.67 billion in September 2021.

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