The rupee bounced back on Wednesday to gain Rs2.5 against the US dollar in the interbank market as the currency closed the trade at Rs172.78, after Saudi Arabia announced a support package of $4.2 billion for Pakistan, traders and bankers said.

The Saudi money will help shore up the country's foreign reserves, which have been shrinking.

The dollar was being quoted at Rs173.00/173.11 around midday. Throughout the day, the rupee endured a highly volatile trading session, with an intraday high bid of Rs175.20 for a dollar and an intraday low offer of Rs172.80.

On Tuesday, the dollar was being traded at a record Rs175.27 in the inter-bank market. The local currency has depreciated around 13.6 per cent since May.

“Rupee appreciation is [the] result of the Saudi funding announcement, widely seen as a positive surprise much needed to bolster the external account,” Saad Hashemy, executive director at BMA Capital, told Reuters.

Asad Rizvi, former treasury head at the Chase Manhattan Bank, said: “Saudi Arabia agreed to provide $1.2bn oil on deferred payment and cash deposit of $3bn, while the REER index fell for the fourth consecutive month to hit 95.9 which supports a stronger PKR. And with IMF money in the pipeline, the rupee should take a breather.”

Saudi Arabia on Tuesday agreed to revive its financial support to Pakistan, including about $3bn in safe deposits and $1.2bn to $1.5bn worth of oil supplies on deferred payments, Information Minister Fawad Chaudhry announced.

Pakistan has been in talks with the International Monetary Fund for the last two weeks to secure a $1 billion tranche, but its sixth review remained inconclusive.

The Saudi government would immediately deposit $3bn in Pakistan’s account for a year and keep it rolling at least until the completion of the IMF programme in October 2023, a government official told Dawn.

The facility is expected to help Pakistan convince the IMF about its financing plan.

Prime Minister Imran Khan thanked Saudi Arabia.

“The Kingdom of Saudi Arabia has always been there for Pakistan in our difficult times, including now when the world confronts rising commodity prices,” he said in a tweet.

In 2018, Saudi Arabia gave $3bn in foreign currency support and further loan worth up to $3bn in deferred payments for oil imports.

Since the start of the fiscal year 2021-22, the dollar has gained about 11pc against the rupee, while it gained Rs23 since May when the greenback was traded at Rs152.28.