Political woes mount, but rupee rebounds

The rupee was steady on Monday, holding on to gains made in thin trade on Saturday and trading 3.5 percent above Friday’s all-time closing low, dealers said.Fears that Pakistan’s six-week-old coalition government could splinter following the failure of negotiations between party leaders in London at the weekend, has eroded confidence. The currency has been undermined by a mounting oil import bill and inflation running at a 13-year high. On Monday the rupee was quoted at 67.00/50 per dollar, up from 69.40/60 on Friday when its 3.5 percent plunge brought the currency’s losses to 12.7 percent so far this year. Although Friday’s decline has been reversed, it was uncertain whether the recovery would last as few deals had been done on Saturday or Monday morning, and banks reluctance to trade was evident by the wide bid/ask spreads being quoted.”Sentiment had improved after the State Bank of Pakistan (SBP) statement on Friday,” said a dealer in Karachi. To calm nerves, State Bank said on Friday evening that foreign currency inflows of up to $3.5 billion were expected in the short to medium term, which would help stabilise the rupee.Governor Shamshad Akhtar said in the statement that there was no crisis and the rupee’s weakness did not reflect macro-economic fundamentals.The State Bank also said it would take whatever steps were needed, while keeping a tight monetary stance, and on Saturday it warned speculators, saying it would increase inspections of banks, and ordered exporters to bring their earnings home. There is speculation that the State Bank will soon raise interest rates, as propping up the currency through intervention was becoming increasingly hard with less than $10 billion left in foreign exchange reserves.”After last night’s political events, it’s become a wait and see situation,” the Karachi trader added.The main coalition partners, Asif Ali Zardari and Nawaz Sharif failed to break a deadlock over the reinstatement of about 60 judges dismissed by President Pervez Musharraf last November, rekindling speculation the government might collapse. Former prime minister Sharif is set to decide on Monday if his party will stay in the coalition.The Karachi Stock Exchange benchmark index was down 0.37 percent at 14,175.55 points at 0523 GMT.