Rupee Steady with Chinese Inflows and Eid Boost

Rupee Finds Stability as Chinese Inflows and Eid Supply Bolster Market Sentiments

KARACHI: The Pakistani rupee is anticipated to remain stable in the upcoming week, supported by fresh inflows from China and an increase in supply due to the Eid festival, according to reports in The News. Market sentiments, which had been cautious due to concerns over the stalled International Monetary Fund (IMF) program, have strengthened following the confirmation of refinancing. The rupee maintained a range-bound trading pattern against the US dollar in the interbank market, ending the week at 287.19 on Friday, reflecting a marginal gain of 0.15% during the week.

Foreign exchange traders believe that the recent Chinese inflows will have a positive impact on the market. A foreign exchange trader stated, "The market is likely to respond favorably after Pakistan received Chinese inflows. This is encouraging, especially considering that Pakistan's foreign exchange reserves fell below $3 billion after the repayment of a commercial loan to China." The trader further added that the rupee value is expected to remain relatively stable in the coming week, with an uptick in the supply of hard currency anticipated as Pakistanis living abroad send money back home for purchasing sacrificial animals during the upcoming Eidul Adha festival.

On Friday, Pakistan received $1 billion from China as part of a refinancing arrangement for a loan that had already been paid during the previous week. Although these transactions are not yet reflected in the country's foreign exchange reserves as of June 9, they will be accounted for in the following weeks. Pakistan is relying on China to alleviate its payment pressure by extending loans, as concerns regarding the country potentially facing a default loom.

In addition to the Chinese inflows, Pakistan plans to repay a $300 million loan to China on Friday, and another $1 billion loan is set to be rolled over by June 30, according to State Bank of Pakistan Governor Jameel Ahmad, as reported by Bloomberg. While the rupee currently appears stable, analysts predict potential volatility in the following months.

Currency traders are already factoring in a weaker rupee in July, mainly due to a change in government leadership from Ishaq Dar to a caretaker government (assuming elections are announced), which would expose the rupee to demand and supply dynamics, according to Tresmark analysts. Furthermore, the end of June is typically marked by heavy import payments related to defense. Swap premiums have also been corrected, indicating a decrease in foreign exchange liquidity in the interbank market. If Ishaq Dar departs, analysts suggest that the rupee may quickly decline to the 300 level and struggle to find a bottom.

The dynamics of demand and supply will come into play, assuming there are sufficient funds available. According to the State Bank of Pakistan's monetary policy statement, $3.6 billion is due in June, with $2.7 billion eligible for rollover. This implies an outflow of $900 million, as estimated by Tresmark. Moreover, the government has budgeted for a $6 billion current account deficit in the next fiscal year, and analysts anticipate this figure to increase due to the expected continued decline in remittances.

However, even considering the government's figures, there is a projected monthly deficit ranging from $300 million to $700 million. The lack of credible sources of inflow has made the market uneasy about dollar liquidity. This situation renders the Real Effective Exchange Rate (REER) or fair value useless until liquidity constraints are addressed, according to analysts.

Overall, the rupee is expected to maintain stability in the near term, supported by Chinese inflows and increased remittances during the Eidul Adha festival. However, potential volatility may arise in the coming months due to political transitions, heavy import payments, and ongoing concerns about the country's current account deficit and liquidity constraints.