Recipe for an undervalued rupee?

Byline: Jawaid Bokhari

As expected, the rupee is now frequently allowed to adjust to widely unacceptable parity with the dollar on the basis of demand and supply. The exchange rate is operating in a rigged, thin currency market, steered by the 'invisible hands' of the central bank and prompted by the International Monetary Fund (IMF).

However, the move towards 'market determined exchange rate', whatever it means, is creating problems. The mid-May bout of devaluation was too much for the broad segments of the market to digest as indicated by the stock exchange's shrill response. Between January 1, 2018 and May 17, 2019, the rupee had depreciated by 34 per cent against the dollar.

Before his resignation, former State Bank governor Tariq Bajwa had reiterated more than once that the rupee's exchange rate had achieved price equilibrium. And going by his statement, the latest exchange rate adjustment seems to be uncalled for and excessive.

With the real effective exchange rate and intrinsic value of the rupee ignored, devaluation has lost all prudent limits as currency markets lack discipline

To address the issues thrown up by a steep devaluation, the cash-strapped, debt-ridden government is considering setting up a fund to support the beleaguered national bourse. The fund is to be channelled through the National Investment Trust.

A dollar fund may also be created as advised by the IMF to beat back speculative attacks on the rupee with the condition that the State Bank will square off all its interventions at the end of each quarter. The question arises: what kind of markets are we creating?

The government is saddled with a record $105 billion foreign debt which keeps soaring in rupee terms with every bout of devaluation. Debt servicing is becoming more problematic.

By one estimate, the debt surged by Rs661bn because of the rupee depreciation in two days of this month. Within 48 hours, the rupee touched Rs150 to a dollar in the inter-bank market, a level that was maintained in the next trading session the following Monday.

A State Bank statement explained: 'this movement reflects the demand and supply conditions in the foreign exchange market. It will help correct market imbalances.'

Analysts say every devaluation in the past few years has followed the same pattern. Also, by a strange coincidence, some of the devaluation moves have been preceded by hoarding that creates an artificial shortage of dollars in the currency market. Thus the currency...