Jawad Ahmed ISLAMABAD, April 18 (INP-WealthPK): The announcement of the State Bank of Pakistan (SBP) to increase the policy rate by 2.5% in order to curb the depleting foreign exchange reserves and rising inflation in the country has helped stop the rupee’s slide against the US dollar, reports WealthPK. Following a 2.5% rise in the benchmark policy rate, the interest rate soared to a staggering 12.25% from 9.75%, the highest level since 1996. Right after the announcement, the money market showed positive response, and the rupee appreciated 1.9% against the US dollar to 184.68 from 188.17 as of April 8, 2022, according to the data released by the SBP. The SBP's foreign exchange reserves, on the other hand, are continuing to decline. The reserves fell below $11.5 billion for the first time in over two years after a significant outflow of $4.893 billion in five weeks, primarily due to debt repayments. The State Bank governor, in a recent statement, had said that the depleting reserves were a cause for serious concern, “but we are convinced that the central bank's initiatives will prevent further deterioration.” According to the SBP, its foreign exchange reserves have dropped to $11.319 billion from $16.212 billion in five weeks. This massive drop in reserves is due to the scheduled debt repayments and government payments pertaining to the settlement of an arbitration award related to a mining project. [caption id="attachment_66163" align="aligncenter" width="696"] Source: State Bank of Pakistan (SBP)/WealthPK Research[/caption] In just two weeks, foreign exchange reserves fell by more than 24%, from $14.962 billion to $11.319 billion. “The reason for massive increase in the policy rate is due to a significant increase in the commodity prices in the international market and global financial conditions, which has been exacerbated by the Russia-Ukraine conflict,” the SBP said. The impact of international commodity prices and the Russia-Ukraine conflict has been transmitted to the local economy, since the country is confronting a continual inflationary crisis. [caption id="attachment_66164" align="aligncenter" width="696"] Source: State Bank of Pakistan/WealthPK research[/caption] According to SBP estimates, the inflation rate has been rising since the beginning of fiscal year 2021-22. Since November 2021, it has been in double digits. Inflation increased in March 2022, hitting 12.7% compared to 12.2% in the previous month. The average inflation during first nine months of current fiscal year (July-March) stood at 10.7%. According to SBP revised forecasting, inflation is expected to continue slightly over 11% in the ongoing fiscal year before moderating in the next fiscal period. This increase is due to a jump in commodity prices on the international market, supply chain disruptions and the Russia-Ukraine conflict.