Can rupees get back their place?
As we all know, because the State Bank of Pakistan (SBP) does not have enough forex reserves, the rupee has been falling to all-time lows over the past few months have been particularly busy, and the week of July 22 was no exception.
Meanwhile, growing political instability becomes the springboard of all kinds of speculations against the rupee`s health as well as Pakistan`s prospects of dodging what to some sceptics, appears that there is an “imminent” threat of sovereign debt default.
Apart from political instability and structural weaknesses of the external sector, higher fuel and food prices have contributed to the economic weakness, the rise of the US dollar against major currencies, geopolitical challenges facing Pakistan and the delay in the revival of the International Monetary Fund`s (IMF) lending, all played their part in making the rupee weak and vulnerable to speculation-driven attacks.
A week after it reached an all-time low of 210.95 per dollar on July 15th, the rupee lost 8.25 per cent of its value against the US dollar, closing at 228.36 per dollar on 22nd July. To equalize extreme volatility, you can only do one thing: equalize extreme volatility.
Due to this massive decline in the value of the rupee within a week, which follows the current trend, inflation is bound to continue to rise, upsetting both household and business earnings/spending projections.
Prominent business lobbies, including the Pakistan Business Council, are urging politicians to agree on a five-year agenda for economic reform to secure and defend the country’s economic sovereignty. The value of a currency continues to be determined primarily by the supply and demand of foreign exchange. SBP cannot be effected without the support of the IMF or friendly countries.
However, a great drama in the Punjab election on July 22 suggests that Pakistani politicians may not be aware of the seriousness of the many economic challenges facing the country. Increase. Between April 7 (when then Prime Minister Imran Khan was expelled from the administration) and July 22, Rupee had both a yelling trade deficit and rising political instability and uncertainty.
Against this backdrop, it fell 21.3% against the US dollar. The key question now is how long the rupee will continue to fall. No one can answer this question. Not even the Pakistani government or SBP. Things will be a little clearer if the IMF’s board approves the revival of the lending program and hopes to release about $ 1.17 billion to Pakistan sometime in early August.
Even before that, Pakistan has already signed a staff-level agreement with the IMF, which only requires formal approval by the IMF’s board of directors, so China, Saudi Arabia, and the United Arab Emirates have billions in SBP accounts. You can consider putting in dollars. Be expected.
If this happens and foreign exchange reserves increase significantly, it could give the central bank room to provide “limited” support to the rupee. (SBP’s foreign exchange reserves gradually declined from $ 11,425 million at the end of March 2022 to $ 9,328 million (or a month and a half of commodity imports) on July 15).
With the market-driven exchange rate system currently pursued by Pakistan and carefully “watched” by the IMF, SBP cannot artificially keep the value of rupees high. All you can do is “equalize extreme volatility”.
This means that SBP can sell dollars in the market if the high demand for greenbacks causes a significant loss of rupee value in a single trading session or several consecutive sessions. increase. This also means that the amount put into the market this way must be repurchased by
SBP in exceptional cases at the end of the month or quarter. This means that the value of the rupee will continue to be determined mainly by the supply and demand of foreign exchange, even if it hits lows one after another during a period of high political instability, and it is possible that the lost value will eventually be regained.
This means that there is. Whenever the supply of forex in the market improves significantly. This allows us to revert to the structural causes of the balance of payments (BoP) weaknesses.
In the balance of payments, the two most important sources of non-debt inflows are
(1) remittances and
(2) exports of goods and services.
In addition, we have two major sources of foreign exchange outflows:
(1) imports of goods and services and
(2) repayment of external debt.
Understand what remains to handle external debt if our total imports and services have used up more than 90% of our foreign exchange revenues through remittances, total exports, and foreign investment. Is not a genius. There is almost nothing.
That is, the government has some form of external debt (Sovereign Wealth Fund, International Trade Credits, and most importantly the IMF’s BoP Support Fund) to avoid defaults and keep central banks at a comfortable level of foreign exchange reserves. It means to continue borrowing.
Imported goods for the same 3 months. According to SBP, between July 2021 and May 2022, the total import value of Pakistani goods and services was US $ 75.74 billion (US $ 65.462 billion + the US $ 10.284). Meanwhile, our foreign exchange revenues from remittances and exports of goods and services totalled $ 64.061 billion ($ 28.41 billion + $ 29.333 billion + $ 6.318 billion).
Need more evidence of what the real problem is in Pakistan’s external sector?
For a long time, a country may have to continue to borrow from outside just to repay or repay its old external debt and maintain minimal foreign exchange reserves with SBP. Unfortunately, the sudden (and persistent) rebound of the rupee remains elusive in the short term. The rupee is steadily declining and there are no signs of a significant rise in the near future. The Indian currency closed at about 79.30 per US dollar on Wednesday. This is not far from the all-time low of 79.37 in the previous session.
Why is the rupee going down?
In order to determine the value of the Indian Rupee vs. US Dollar, supply and demand must be taken into account. As the demand for the dollar increases, the value of the rupee decreases, and vice versa. The Indian currency has been on a downtrend since the beginning of the year, especially due to global economic challenges exacerbated by supply chains affected by the Russian-Ukrainian war, COVID pandemic, inflation and soaring oil prices.
In the case of countries, like India, there are more imports than exports, so the demand for the dollar exceeds the supply and the home currency falls against the dollar. Experts say the recent fall in the rupee was mainly due to higher oil prices, a stronger foreign dollar and an outflow of foreign capital.
This year, a foreign institutional investor (FII) sold more than $ 30 billion in shares, resulting in a sharp outflow of foreign capital from the domestic market. This far exceeds the $ 11.8 billion sale seen during the 2008 global financial crisis. When money flows out of India, the rupee-dollar exchange rate will be affected and the rupee will fall.
Such devaluations are putting great pressure on the already high import prices of crude oil and commodities. This in turn leads to higher import inflation and higher production costs, as well as higher retail inflation. The US Federal Reserve has recently raised interest rates, and yields on dollar investments have risen compared to emerging markets like India. There are also reports of potentially more aggressive rate hikes by the US Federal Reserve, which will further hurt the rupee.
In summary, intensifying inflation, the Covid crisis, monetary tightening by major central banks, and supply chain turmoil caused by the war between Russia and Ukraine have slowed global economic activity, leading to a significant decline in rupees. increase. Dollar. So what’s the solution to stop this worrisome rupee fall?
Last week, the government took some steps to announce gold tariffs and higher export taxes on gasoline, diesel and ATF to control foreign trade to curb the fall in the rupee. The gold import tax has also been raised from 7.5% to 12.5%.
The Reserve Bank of India is expected to support currencies by selling dollars in spots, futures and other derivatives markets. It could also raise interest rates further as part of a process that could seduce foreign investors into debt. But is that enough?
” Meanwhile, assuming that the new global energy order poses long-term problems for the oil market, India should increase exports and reduce imports even more strongly. Otherwise, 15 of GDP.
The RBI currency buffer, which drops to% (a recipe for external instability as seen in the 2013 taper export), cannot be ruled out in the coming years. Therefore, the correct strategy is to slowly weaken the INR over time, leaving room for improvement in CAD.
The RBI believes that a gradual adjustment in the exchange rate to a new reality can eventually function as a macrostabilizer for the policy response functions, even if it must be done in an orderly manner. This is the conclusion of a research note from Emkay Global Financial Services.
There may not be an easy way, but experts agree that India needs to work strategically to control imports and increase exports. The government may also more aggressively promote the use of domestic products in the future to reduce imports and strengthen rupees.
edited and proofread by nikita sharma
