The sudden and surprising decline of the rupee against the dollar by a hefty 3.1 per cent, in the opening hours of interbank trade last Wednesday, left both the money and the stock markets in disarray.

That day, the dollar rose to Rs108.50, before settling at Rs108.25 by close, which was billed as the largest single drop in the rupee’s value in nine years.

The Ministry of Finance distanced itself from the drama enacted solely by the State Bank of Pakistan (SBP). A furious finance minister summoned a meeting of top bankers of leading banks a day later.

But what came of it was a mild statement of a ‘communication gap’ between the SBP and the Ministry of Finance, which was — we were told by Finance Minister Ishaq Dar — at the heart of the rise and fall of the dollar against the rupee.

In this day and age, a ‘communication gap’ between responsible people in two cities of the same country, on such an incredibly important issue, is hard to digest.

The Finance Minister stressed that the dollar-rupee parity would be determined by ‘market forces’, but in the same breath pledged that the rupee would be maintained somewhere between Rs107 and Rs105. Whither the SBP autonomy?

Stock strategists say that foreigners have been waiting for the currency to find its true value before entering the market

The Pakistan Stock Exchange (PSX), which boasted of having given investors a return of 46pc —the highest in Asia and fifth highest in the world — a year ago, has been humbled with a minor 2.6pc return in the January-June half of 2017.

Barring the United Arab Emirates, China, Qatar and Russia, the PSX index has underperformed most of the regional bourses.

Most market participants complain that foreign investors have been the spoilers of the market.

With 30pc of the free-float, they still remain a force to be reckoned with.

During the January-June period, foreign investors remained net sellers and offloaded stocks worth $333 million — over eight times the $41m sell-off during the same period last year.

But the unkindest cut of all was the net selling of $81m by foreigners on May 31, on the eve of Pakistan’s re-entry into the MSCI Emerging Market, in place of the consensus forecast of a huge inflow of $450m.

The fall of the stock market since has been unstoppable and we hear daily stories of investors who have been ruined.

One big reason for foreign funds’ reluctance to enter the PSX has for long been touted by market pundits, analysts and brokers as the foreigners’ belief that the rupee is over-valued.

Stock strategists at brokerage houses that cater to foreign clients say that foreigners have been waiting for the rupee to find its true value, before entering the market, lest the rupee depreciates after they buy stocks and they incur heavy losses.

Lesser dollars would buy more shares after devaluation, so why not wait.

Last Thursday, foreigners made an entry into the market to mop up stocks worth $7m, apparently on the faith of the 3.1pc rupee devaluation.

A reversal the next day would find them trapped. Foreign investors, frustrated due to the uncertainty, might now put their investment plans in PSX on the hold for a long time.

Soon after the first news of a devaluation of the rupee last Wednesday, stock brokerages started to release reports on its effect on share prices.

Alfalah Securities (Pvt.) Ltd, a subsidiary of Bank Alfalah Ltd stated: “We feel that a gradual/controlled devaluation would be positive for the market, as foreign buyers who have been delaying purchases fearing exchange losses would start to flock in”.

And Alfalah Securities further worked out that in terms of market as a whole, 32pc of market capitalisation would be positively impacted, 30pc would be slightly positively impacted and 16pc of capitalisation would be neutral.

While it would be slightly negative for 16pc of the market and only 6pc would face a material negative impact.

Topline Securities stated that during the day (last Wednesday), Investors were busy repositioning their portfolios evident by the sector specific movements.

The losers were the Engineering (-4.3pc), Refinery (-3.9pc), Cable and Electrical (-3.8pc), Auto Assemblers (-3.3pc), Cement (-1.6pc) and Pharma (-1.4pc) sectors, which the brokerage said “was likely on the belief that the rupee depreciation may spike raw material costs.

And Elixir Securities stated that primarily, the Oil and Power sectors came into the limelight owing to their dollar-indexed revenue streams where Hub Power rose to its ‘upper circuit’, Pakistan Petroleum was up by 4.4pc, OGDC gained 2.4pc and Pakistan Oilfields spiked 4.1pc.

Brokerage, Intermarket Securities, pondered that historically, the Pakistani market’s risks have revolved around politics, security and the currency.

“While the security situation has considerably improved over the last few years, politics and the rupee are both giving cause for worry”, it said.

Published in Dawn, The Business and Finance Weekly, July 10th, 2017