Rupee to weaken 10pc in FY14

LAHORE  - Though the local currency has already depreciated by 5.2 per cent just in three months of the current fiscal year, the money market experts have projected the rupee will depreciate by average 10 per cent in FY14, as the government has to meet IMF targets to get the next tranche. Hence, the forex and money market may continue to face this type of situation at every quarter end.
They said that after touching peak of Rs110.5, the US dollar settled at Rs105.5 in the inter-bank market after the central bank intervention. Incorporating inflation and rupee depreciation, they maintained their stance of 100bps increase in policy rate in FY14 with higher probability of 50bps increase in November MPS. “Higher than estimated inflation due to recent energy reforms and rupee depreciation carries the potential to revise inflation and discount rate forecasts.
Further, in order to provide support to falling rupee, SBP can also raise discount rate more than estimates,” observed Zeeshan Afzal, financial market expert at Topline.
He stated that apparently it looks like that inflation and rupee will be the key issues and, resultantly, SBP will increase discount rate more aggressively to keep real interest rates positive. As per statistics, in FY14 to date, 1 years government paper yield has increased by 125bps to 10.25 per cent while 2 years paper yields have increased by 195bps to 11.30 per cent. Based on current yields, implied 1-Yr forward yield (that is one year rate in Sep 2014) is calculated at 12 per cent. This 1- Yr forward rate was close to 10 per cent on July 1, 2013. In other words, money market has incorporated about 150-200bps increase in discount rate in next 12 months (ending September 2014).
Experts said that Pakistan markets welcomed new economic managers and there was a feel-good factor amongst the investor community.  However canvas started to fade out after evaluating strict targets in IMF deal coupled with higher inflation outlook of SBP that has already resulted in an unexpected 50bps hike in policy rate. At the moment, movement of Pak Rupee (that is down 5.2 per cent in FY14 to date) has become another concern due to no major effort seen to control its volatility. After crossing Rs110/US$ the question now arises about the fate of interest rate in light of higher than anticipated inflation due to weak local currency coupled with the fact that SBP may use interest rate tool to control falling Rupee.
Based on various methods, experts calculate 9.5-10.5 per cent average CPI for FY14 with Sep CPI likely at 7.5-8.0 per cent and double digit inflation from November onwards. In 2MFY14, CPI has averaged at 8.4 per cent.