The rupee shed 70 paisa on Monday, closing at Rs101.20 to a dollar in the interbank market.

The decline in the rupee’s value was more pronounced in the open market where it lost Rs1 against the greenback.

According to Bloomberg, the rupee declined for the fifth consecutive day amid political gridlock in Islamabad, marking the biggest one-day fall since February 2009.


The rupee has faced volatility during the last one year partially because of varying levels of foreign exchange reserves held by the State Bank of Pakistan (SBP).

They currently stand at $8.9 billion, up a massive 192% from November 28, 2013, when the rupee-dollar parity stood at Rs107.80. The subsequent rise in foreign exchange reserves was followed by 8.8% appreciation of the rupee against the dollar between December and July.

But calls for civil disobedience at a sit-in being staged by two opposition parties outside parliament has already resulted in the rupee’s depreciation of 2.8% in the interbank market since the beginning of August.

What the central bank had to say

Last week, SBP Director Dr Hamza Malik told a news briefing the movement in the exchange rate was because of political uncertainty. Noting that the underlying fundamentals of the economy were strong, Malik had expressed hope that the drop in the rupee’s value would be a ‘short-term blip’ followed by a return to a ‘relatively normal’ exchange rate.

KASB Securities research analyst Sarah Mazher seems to be in agreement with Malik. In a research note issued to her clients on Monday, she said the volatility in the rupee-dollar exchange rates should be short-lived.


“Expected contributors of foreign exchange build-up in 2014-15 are privatisation plan, launch of Eurobond/Sukuk bonds of $500 million each, and the 4G licence auction. Timely materialisation of these plans remains contingent on the resolution of the political turmoil,” she stated.

Mazher also highlighted the fact that the seasonal demand for dollars is expected to remain high in August, as travellers prepare for upcoming Hajj.

“The worst case scenario of a change in government, though unlikely, will affect US support and the ongoing International Monetary Fund (IMF) programme, which will be seen negatively by international rating agencies,” she said, adding that her brokerage maintains its exchange rate forecast of 2% depreciation to Rs101 by June 2015.

Analysts believe the SBP is refraining from intervening in the foreign exchange market. They believe its refrain is a conscious attempt to let the dollar appreciate against the rupee.

The central bank had evidently played a role in strengthening the rupee against the dollar in March even though its foreign exchange reserves were only $5.3 billion. But it has shied away from injecting liquidity this time, giving rise to the speculation that policymakers are comfortable with the dip in the rupee’s value against the dollar.

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