Over the past one month, the rise and fall in the valuation of rupee has created a sense of uncertainty in the market. Rupee was devalued by 3.1% on July 5th as State Bank of Pakistan failed to intervene in order to let the rupee find its own valuation. Since then, there has been strong monitoring by central bank in the backdrop of ex-Prime Minister, Nawaz Sharif’s qualification on July 28th that did not result in the devaluation of rupee in the interbank market.
However, in the open market, rupee devalued from Rs. 107 to Rs. 109, a 2% increase in a single day. SBP sprang into action once again and directed to keep the rupee stable and bring it back to the same value that it had on July 28. These were the instructions that were received by forex companies from the central bank.
The forex market has its concerns over the rupee valuation with no fixed rates available to them. Forex companies, for now, believe that things will continue to run like this and the situation will be clearer at the end of the current quarter. For now, it is very clear that the rupee will not be devalued again and the central bank is taking all the required action for this.
A forex dealer at a local bank said that it looks as though the State Bank is behind the gradual depreciation of rupee. He based his observation on the fact that the forex reserves in the country continue to plunge. Foreign exchange reserves were down from $16.197 billion to $14.698 billion in the last three weeks of July. Dollar is in short supply right now and the central bank is willing to reduce the foreign exchange in order to keep the rupee stable.
The problem lies with the increasing current account deficit that has swelled up to $12 billion in FY 2017 as compared to only $4.867 in 2016. If proceeds from exports are not increased, the current account deficit will continue to rise making it difficult for the central bank to keep the dollar rate stable at $105 in the interbank market.
The export sector has raised its voice numerous times to devalue the rupee which will give boost to the export proceeds. And if the current account deficit continues to increase at the current level, than the government might be left with no other option but to devalue the currency in order to bring some stability in the economy