Rupee took ‘less beating’ than regional currencies

[Devil Soul]

Rupee took ‘less beating’ than regional currencies

June 29, 2013 Our Staff Reporter
LAHORE - At the time when regional currencies are experiencing a free fall against a strengthening dollar, Pakistani rupee has maintained its stability.

Financial market experts observed that Pakistani rupee did not face the same situation as faced by its regional peers because, during the last one month rupee shed only 0.6 per cent against the US dollar, signaling towards the stability of local currency at the time when US dollar is globally high in demand. Emerging market currencies such as Indian Rupee, Malaysian Ringgit, Philippine Peso and Thai Baht fell sharply in the last few weeks.

They believe that change in political canvas is the prime reason behind the rejuvenated investor confidence that has brought $59 million to Pakistan stock market in the past 30 days, and $208 million since elections while rupee has depreciated by only 0.6 per cent in the past month. Cumulative foreign inflow of $1.2 million (including Jan-May net FDI of $761 million and YTD FIPI of $410 million) has helped in easing the burden of IMF repayments of $1.4 billion and kept YTD rupee depreciation limited at 1.8 per cent.

They said that talks ongoing with the visiting IMF team regarding a fresh loan of $4.5-5 billion also kept rupee stable. This coupled with other likely inflows from US (CFS) and Saudi Arabian oil facility is likely to provide stability to Pakistan’s forex reserves and help the country to make IMF payment of $1.8 billion in 1HFY14. However in order to keep competition in the export market, some decline in rupee cannot be ruled out. Financial experts at Topline securities maintained that ever since Fed Chairman announced that US central bank will slowly tapper off its quantitative easing program on the back of improvement in the US economy, many currencies have seen their value coming down against the green back. In Asia, this impact was further fueled by weak Chinese production data coupled with sell off in capital markets.

Asian currencies recently tumbled to 21-month low as US Fed in its monetary policy meeting on June 20, 2013 announced its plan to slow down the monthly bond purchase spree of $85 billion. Improvement on the US economic front means that the quantitative easing should conclude in 2014 as long as the economic improvement stays in line with Fed’s estimates. Furthermore, reports of contraction in Chinese manufacturing segment has also put additional burden on regional currencies.
Rupee took

 

[Toxic Alien]

Pak Rupee is 99.5 /dollar compared to 59.4 fro Indian Rupee.

Pak rupee is really weak

 

[Manindra]

So, they want drowned the PKR which already fell on ground

 

[Evil Flare]

Pak Rupee is 99.5 /dollar compared to 59.4 fro Indian Rupee.

Pak rupee is really weak

its on 97 to 99 range from past 1 year ... so basically there is no major drop at all

 

[SBD-3]

Whether PKR is 99 or 1999 doesn't mean anything. It may represent a false political pride but no economic reality. The point of policymakers is to keep the foreign exchange rate stable (regardless of its level). Such is necessary to minimize the foreign exchange risk. The exchange rate serves as a automatic stabilizer of external account. If the imports increase, the outflow of foreign exchange increases causing a depreciation in local currency. This in turn, makes imports expensive thereby reducing demand. The depreciation also encourages more exports on the other hand since now exporters get more local currency for each dollar so exports increase as a result of depreciation of PKR. The situation continues unless a new equilibrium is reached. Those who think a stronger currency is the aim of policy making, should have some readings on "currency wars".

 

[muse]

Whether PKR is 99 or 1999 doesn't mean anything. It may represent a false political pride but no economic reality. The point of policymakers is to keep the foreign exchange rate stable (regardless of its level). Such is necessary to minimize the foreign exchange risk. The exchange rate serves as a automatic stabilizer of external account. If the imports increase, the outflow of foreign exchange increases causing a depreciation in local currency. This in turn, makes imports expensive thereby reducing demand. The depreciation also encourages more exports on the other hand since now exporters get more local currency for each dollar so exports increase as a result of depreciation of PKR. The situation continues unless a new equilibrium is reached. Those who think a stronger currency is the aim of policy making, should have some readings on "currency wars".

Why does it seem that the flow foreign exchange is restricted in Pakistan? As if it were some sort commodity which is very limited - can you please help us understand why this and why it persists?

 

[SBD-3]

Why does it seem that the flow foreign exchange is restricted in Pakistan? As if it were some sort commodity which is very limited - can you please help us understand why this and why it persists?

The concept is called capital account convertibility. Why do countries (including Pakistan) maintain closed or limited covertable capital account? You can have a look into east asian crisis of 90s to understand the risks associated with full capital account convertibility.

However, before the formalization of CAC, there were problems with the theory. Free flow of assets was required to work in both directions. Although CAC freely enabled investment in the country, it also enabled quick liquidation and removal of capital assets from the country, both domestic and foreign. It also exposed domestic creditors to overseas credit risks, fluctuations in fiscal policy, and manipulation.
Capital account convertibility - Wikipedia, the free encyclopedia

 

[Argus Panoptes]

Why does it seem that the flow foreign exchange is restricted in Pakistan? As if it were some sort commodity which is very limited - can you please help us understand why this and why it persists?

If we allow free flow of forex, it will almost all take flight abroad, never to come back, for it seeks security and better returns, both of which are not present in Pakistan.

 

[debottam]

Pak Rupee is 99.5 /dollar compared to 59.4 fro Indian Rupee.

Pak rupee is really weak

The absolute value of a currency's exchange rate doesn't indicate anything about the country's prosperity, regardless whether it's fixed or floating (Japanese Yen has an exchange rate of 100 to the dollar). It hardly costs anything to print paper money, the only 'problem' with a high exchange rate is that you will have to carry more individual notes per transaction. What's important is that the exchange rate should be stable. Sudden rapid change in exchange rate is what policymakers try to avoid as it disrupts short term planning.

A floating currency's exchange rate is maintained by a dynamic equilibrium of import and export. The more a country exports, the higher its currency's value goes against other currencies and vice versa. Because when you sell to a foreigner, suppose someone from Eurozone, he will have to convert his Euro to Rupee first i.e. buy Rupee by selling Euro in forex market. Only then he can buy goods from you. This creates a demand for Rupee which pushes it up against Euro. The reverse is true for import. At any certain moment, depending on the market state, this mechanism will stabilize at a certain level and you will get the exchange rate at that point.

Left to its own, this mechanism will automatically adjust itself. However there are externalities which affect the exchange rate. One such scenario occurs when a government simply prints paper money to cover its deficit. This enables more people to afford goods, including foreign goods and import increases, resulting in the currency's depreciation and inflation in general. In last two years INR depreciated from 45 INR/$ to 59 INR/$ only because of this. UPA government had engaged in huge public spending. Without enough revenue they resorted to the printing press. As a result inflation skyrocketed (12% at CPI) and INR depreciated. Currently the RBI is trying to control the situation by curbing import, most importantly, gold.