Rupee’s moment of truth?

The moment Maryam Nawaz entered the JIT investigation room, rupee fell 3 percent against the greenback. And the inevitable happened right after Dar’s visit to the Judicial Academy. Is it a mere coincidence, or is there a link of political happenings on sudden currency depreciation?

Let’s not speculate on the political linkages; but one thing is for sure that there is no lumpy payment that has caused the sudden currency depreciation. The SBP has consistently intervened in the market and has not let the currency to correct even if the reserves fell, or the current account deficit was at multiyear low.

PMLN’s economic bet is on a stable currency; but there is a cost to it. Exports are suffering, imports are becoming cheaper, and FDI is hard to come by. Lately, with burgeoning current account deficit, the pressure on currency adjustment was building. Dar was apparently waiting for the right time.

One may wonder, there is supposedly a free float currency regime in the country, how can the Finance Minister drive the movement. It is a managed (dirty) float and an open secret. The SBP informed banks treasurers yesterday morning that the central bank would not intervene to adjust currency. And the next hour it was down by 3 percent - the currency went down to Rs110/USD in the intraday and stabilized at Rs108-108.5 per USD.

Will the SBP continue to not intervene in the market? How much more the currency depreciation is in the offing? The SBP has been tight lipped on the issue and is saying that the market forces are driving currency.

BR Research little birdie says that another 3-4 percent currency depreciation is likely in coming few weeks It can even happen tomorrow; but more chances are that this would happen after a gap of few days or weeks. The good news is that there is no panic in the market and open market is not seeing any pressure of dollar demand.

Dar has not taken the dip well, and has voiced serious concerns on exploitation of political conditions by some market players. Such is the fixation with currency that he has vowed to identify the responsible people and even take action.

All in the name of ‘national interest’.

Hence, the current round of depreciation may be around 5-7 percent including yesterday’s fall. This would bring imported inflation in the market (Read: ‘Inflation in check: currency needs a check’ published on July 4, 2017). Inflation is already picking up, and now the inflationary expectations will build. Seeing the stance of SBP on currency, there is a good chance that monetary policy would be tightened soon.

It is important to see next few days to see the new equilibrium of the currency. A mere 3 percent depreciation might not be enough to trim the current account deficit or to lure foreign flows to the stock market. BR Research opines that a level of Rs115 per USD is required for any meaningful impact.

Once that happens, exports would grow, imports would decline a bit and foreign participants start jumping into the market. As of now, everyone awaits SBP’s next move.