Rupee devaluation: IMF program to help settle US dollar rates – Currency

The rupee at Rs226.81 lost around 10.7% of its value against the US dollar in the first weeks of the 2022-23 financial year.

As I pointed out in the Market Note On June 28, 2022, the fall in the value of the rupee was not only linked to rumors of default due to low foreign exchange reserves, but it also weakened due to two additional factors:

  • Global strengthening of the US dollar
  • Yearly Rupee Weakness

Since the start of FY23, the dollar has strengthened further against a basket of currencies.

The increase from June 30, 2021 to date, as measured by the spot dollar index, is 16.3%.

Assuming the rupee falls by a similar percentage to maintain its parity with the dollar, the pound and the euro, and assuming that the average rate for FY21 is 160 rupees as a base, the weakness of 26 rupees is due to the strengthening of the dollar.

In addition to the above, the rupee is losing around 6% of its value due to reasons such as the inflation differential between Pakistan and the United States.

Therefore, an approximate depreciation in value of Rs10 recorded in FY22 could be attributable to this reason.

Starting from FY21, the average of Rs160 and adding the devaluation of the rupee due to the strengthening of the dollar of around Rs26 and adding the normal devaluation of the rupee of Rs10, we arrive at a value of the rupee of Rs196 (160+ 26+10) for one dollar.

The third element to add to this is the discount that the market expects from the currency of a country that does not have sufficient reserves for three months of imports.

In my opinion, the differential of around Rs31 – between the depreciated value of Rs196 and the current US dollar rate (227-196) – represents this discount.

I expect the current uncertainty over the value of the currency to subside with the approval of the IMF program by the end of August 2022.

My range of US Dollar assumptions for the end of FY23, previously forecast between Rs204 and Rs215, is therefore revised slightly upwards by Rs7 due to further strengthening of the US Dollar.

I now expect the Rupee to close the year between Rs211 and Rs222.

A historical analysis of Pakistan’s stock market performance over the past 19 years since 2004, shows that it does not perform in the year the rupee weakens by more than 10% due to its high impact on the cost of profitability of the company (foreign exchange losses, high interest rates, etc.).

The same is indicated by the heavy selling in the market during the current week.

However, there is a good chance that the market will stabilize and recover if the devaluation of the currency could be reduced and the rupee kept within the above range.

The author is the CEO of Kifayah Investment Management Limited and can be contacted at: [email protected]

DISCLAIMER: The opinions expressed in this opinion piece are those of the author and do not necessarily reflect the editorial position of SAMAA.

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