THE rupee has partly recovered after a steep decline in value on repayment of a big installment of the IMF loan. But bankers insist the fall of the currency had more to do with the exchange rates becoming regionally competitive rather than anything else.

The rupee lost 1.3 per cent value against the dollar during first four days of the week that ended on May 25 but it then recovered 0.3 per cent on the last trading day, thus reducing the actual loss to one per cent. The obvious reason for the decline was that Pakistan repaid during the week $394 million to the IMF as an instalment of a standby credit obtained in 2008.

The central bank made it clear that it had repaid the loan through foreign exchange reserves and dispelled the impression that it had resorted to dollar buying from the market for this purpose. “The movement in exchange rate has been somewhat sentiment-driven rather than any excessive demand and supply mismatches in the market,” it clarified.

Bankers who closely watched exchange rates movement during the week said the rupee decline was well-timed in that it coincided with the latest fall in the Indian rupee.

“Pakistan’s interbank market has matured to the extent that it does not panic (on scheduled sizable outflows) and even if it does, the State Bank successfully smoothes out volatility in exchange rates,” according to a senior executive of one of the top five banks.

“If you look at the timing (of the rupee decline) you’d understand why the SBP did not make any effort to apply brakes on the fall of the rupee,” he said and suggested that the fall in the Indian rupee during the same time prevented the central bank from doing so.

“Pakistan’s exports have seen a five per cent fall in ten months to May. One way of boosting exports is to let the rupee shed some value. And what could be a better timing for this than when the country makes a foreign debt repayment,” he remarked.

During the first four days of the week that ended on May 25 the Indian rupee too had lost 1.8 per cent value against the dollar. And unlike Pakistani rupee which recovered some value on the last trading day, the Indian currency shed more weight bringing the total weekly loss against the greenback to a massive 2.8 per cent.

“Apart from weekly movements, even if you look at exchange rate depreciation in regional currencies throughout this year, you’d find that it is a regional phenomenon,” pointed out a senior executive of another local bank. Since the beginning of 2012, the Indian rupee has lost about 5.4 per cent value to the dollar and Sri Lankan rupee has fallen by about 14.6 per cent. The Bangladeshi taka which has been somewhat steady now had also recorded a 3.2 per cent loss in January and early February. “Against this, the decline in our rupee between January 1 and May 18 (before the latest fall) was just 1.1 per cent. I think the one per cent additional decline during the week (between May 18 and May 25) has helped the rupee become a bit competitive with other regional currencies.” (Now the total fall in rupee value since the beginning of this year comes to 2.1 per cent).

Whereas exchange rates’ competitiveness is one understandable aspect of the recent decline in the rupee value, the weakening in the current account and balance of payments during the current fiscal year is at the root of it. “Only a novice can expect the rupee to remain stable at a time when both the current account as well as balance of payments is in huge deficit,” said treasurer of a foreign bank.

“I don’t think, the recent fall in the rupee value was sentiment-driven. Banks throughout the world keep a constant eye over external account data of an economy while developing an outlook for the currency of that particular economy. Pakistan is no exception,” he argued.

Recently released data show a current account deficit of $3.4 billion in ten months to April 2012 whereas in ten months to April 2011 this account had a surplus of $466 million. The balance of payments surplus of $1.2 billion in ten months of the last fiscal year also turned into a $2.5 billion deficit in the same period of this year.

Bankers are anticipating faster inflows of export dollars after the recent fall of the rupee. But whether it would help stabilise the rupee is a different story. “Much would depend on whether our exports pick up pace and whether imports growth slows down,” said foreign exchange dealer at a local bank. “Current account and balance of payments impact on the health of the currency in a wider scope. What impacts immediately, particularly in our context, is movement in foreign trade account.” —Mohiuddin Aazim