In general, the punch dagger is only useful until better weapons such as the Crossbow and Assault Rifle are obtained. However, the Stamina stat in Strife that affects the player's health cap will also make the punch dagger much stronger, to the point that some players have claimed that they can take out an Inquisitor with a single lucky hit of the Punch Dagger with 90 out 100 Stamina points. In fact, you cannot kill an Inquisitor even with a dozen hits of Punch Dagger, and such rumor is based on the glitch in the game engine which simply removes an Inquisitor from the game when several conditions are met.
It also useful against Acolytes, especially with the stamina upgrades, where it is possible to gib an acolyte in one punch. It also has infinite ammo, and shares with Poison bolts the fact that using it won't compromise stealth and thereby set off alarms.