In the domestic currency market, rupee to dollar parity has demonstrated a stable trend after a one-day debacle on July 5. The US dollar in the currency market was traded between PKR 105 to PKR 107 in the interbank as well as in the open market.
Currently, the dollar is being traded at PKR 105.20-30 in the interbank market while in the open market its rate ranges from PKR 107 to PKR 107.30. The State Bank of Pakistan (SBP) has now assured the currency dealers that dollar to rupee parity will be maintained in the interbank market. Moreover, the central bank has also asked the dealers to cut down dollar price in the open market.
The dollar price in the open market is 2% higher, which the SBP believes should not be higher than 1% of the interbank rate. However, the dealers believe that the price in the open market will come down as soon as the market will recover from the recent decline in the value of rupee.
The 3.1% reduction in the value of rupee prompted the International Monetary Funds (IMF) to declare that Pakistan’s currency is overvalued by 5-20%. The overvaluation of the currency is not only hurting the exports of Pakistan but it’s also widening the current account deficit. The current account deficit increased by a mammoth 149% in FY 2016-17 to $12.09 billion from $4.86 billion in the previous fiscal year.
Therefore, stability in rupee value is essential to ensure that there is no anxiety in the foreign exchange market. The central bank has complete control over the interbank currency market and is now influencing the dealers to keep the dollar price at the same level in the open market.
Since 2013, the government is trying to keep the dollar stable and Finance Minister Ishaq Dar has become an advocate of a strong rupee. But this stance is creating problems for exporters as other regional countries have been devaluing their currencies to support their exports.
However, with imports exceeding exports in Pakistan, a strong rupee will reduce the cost of imports. Therefore, with a strong rupee, the government is trying to reduce the trade deficit that has increased to $30 billion last month.