The Pakistani rupee fell to a four-and-a-half-month low, reaching Rs278.66 against the US dollar in the inter-bank market, continuing its downward trend for the second consecutive working day. This decline is attributed to an anticipated increase in demand for foreign currency following Tuesday’s interest rate cut.
According to the State Bank of Pakistan (SBP), the rupee depreciated by Rs0.16 on a day-to-day basis, resulting in a cumulative two-day loss of Rs0.32. Despite this recent decline, the currency has largely remained stable, fluctuating between Rs278-278.66/$ over the past four-and-a-half months.
The latest depreciation occurred after the central bank reduced its key policy rate by 100 basis points to a 16-month low of 19.5% on Monday. This rate cut has spurred businesses to boost production through more affordable bank financing, increasing the demand for additional imports to support industries and drive economic growth.
This marks the second rate cut in the past seven weeks, with a cumulative reduction of 250 basis points in less than two months.
The central bank also noted a recent surge in import demand to around $5 billion per month, up from approximately $3.5 billion 12 to 15 months ago. The bank projects economic growth to rise to between 2.5-3.5% for the current fiscal year 2024-25, compared to the 2.4% growth achieved in FY24.
Global and local research firms have predicted that the central bank may further reduce the policy rate to around 15-16% in FY25, as inflation in the country slows.
The rupee’s decline also follows a significant reduction of approximately $400 million in the country’s foreign exchange reserves, which now stand at $9.1 billion, according to SBP’s latest weekly report.
Despite the currency market’s downturn, it overlooked the central bank’s report that workers’ remittances from overseas Pakistanis remained above the monthly average of $2.52 billion in July 2024. Additionally, multilateral and bilateral inflows are expected to rise following the International Monetary Fund (IMF)’s new $7 billion programme.
Moreover, the current foreign exchange reserves of $9.1 billion are relatively higher compared to the $9 billion in foreign debt repayments due in the remaining 11 months of FY25.
