KARACHI: The United States Dollar (USD) closed at Rs166 after Pakistani Rupee (PKR) fell by Rs4.53 against the greenback due to a decrease in the interest rate and the subsequent flight of hot money.
The US dollar has gained Rs7.46 in the past three days. On Wednesday, the rupee had fallen 1.63% or Rs2.60 versus the dollar to close at Rs161.60. It had closed at 159 to the greenback in the previous session.
Experts say the major reason behind the rupee’s fall was the rate cut announced by the central bank. A high-interest rate supports the rupee by encouraging hot money inflows into treasury bills.
On Wednesday, the State Bank of Pakistan (SBP) cut the policy rate by 150 basis points, from 12.5pc to 11pc. This followed a policy cut from just last Tuesday when the SBP cut the policy rate from 13.25pc to 12pc.
The policy rate cut can be seen as a reason for hot money leaving the country. Many developed countries are divesting from emerging markets due to the COVID-19 crisis, in order to have liquidity.
While stock markets are falling drastically, global economic fears surrounding the COVID-19 crisis have resulted in liquidity selling. Thereby, capital flight is a common sight as sovereign debt is liquidated.
According to Sami Tariq, Head of Research and business development at Arif Habib Limited, “This should be temporary. As commodity prices are down, yield differential will attract investments again. However, risk aversion at present is resulting in appreciation of the dollar against other currencies.”
Earlier this week, SBP Governor Reza Baqir clarified the exchange rate policy, saying the central bank will intervene whenever there is volatility, but it will not try and actively suppress demand and supply in order to determine the direction of dollar rates.