AFTER losing three per cent value against the dollar in May, the rupee currently looks range-bound in view of falling oil prices and rising workers remittances.

During the week that ended on June 15 the local currency had shed 17 paisa vs dollar which brought its total depreciation in two weeks of this month to 38 paisa or about 0.4 per cent.

“Part of the problem was adverse reporting both in foreign as well as in local media about our external sector” said treasurer of a local private bank. “Whereas the fundamentals of the external sector remain the same, the State Bank has dealt with the issue of speculation (by tightening rules of business for exchange companies.”

In two weeks of June the rupee traded between 94 and 94.40 a dollar in the interbank market and closed at 94.33 on June 15.

“On no occasion we saw unusual activity from the State Bank,” said foreign exchange dealer at a bank.

“Besides, the letters of credit of fuel oil imports for June delivery were a bit less-expensive. And finally, strong inflows of home remittances continue and exporters have now started selling overdue export bills (to take the benefit of the fall in rupee value in May).”

Exporters are generally expected to sell foreign exchange realised through exports within three working days after they get the same transferred into their accounts. But some of them delay it on one pretext or the other when they think the rupee would depreciate. “We witnessed this during last month but with the beginning of June we have noticed faster realisation of overdue export bills,” said foreign exchange dealer at another local bank.

Bankers say that over three per cent rupee depreciation in the last month has also affected the pace of opening of import letters of credit. This combined with the falling international fuel oil prices may have a favourable impact on our balance of trade in June.

International spot oil prices have fallen by about 20 per cent from their peak levels in March. “But we import oil on quarterly basis through future contracts. So we may not get the maximum relief of decline in global prices in a particular period,” a senior official of an oil marketing company explained to Dawn. “But I know that our LCs, maturing this month, are naturally not as bulky as they were in May,” he said and added “we believe this trend may continue for some time.”

Executives of exchange companies say the central bank’s guidelines issued at the beginning of this month on making transactions more transparent played a role in curbing speculation against the rupee. “And I hope that our meeting with President Zardari (in Karachi on June 11) has served as a reminder to those companies that were facilitating the speculators,” said one participant of the meeting.

He said that the president had assured them of his support in enhancing their role in mobilising home remittances. “We
informed Mr Zardari that if exchange companies are given incentives already available to banks, these companies and the banks together can boost home remittances to $20 billion a year.” In eleven months of this fiscal year Pakistan got $12 billion in remittances from overseas Pakistanis and another $1 billion plus is expected to come in during this month.

For some bankers, the current range-bound movement in exchange rates is no indication of rupee stability. “Range-bound or no range-bound, the issue is that unless the current account and balance of payments deficits are not contained, the rupee would remain vulnerable to further depreciation,” said treasurer of a foreign bank.

“The market is not over-reacting at least now to anything (linked to the health of the rupee). But if you look at forward premiums on dollar you’d agree that the perception about the future health of the rupee has not changed in the last two weeks.

Three-month forward premium for example is still above 200 basis points—almost the same level the market saw throughout
last month.”

He and some other bankers cite falling foreign exchange reserves, drying up of foreign investment, decline in export earnings and halting of inflows under Coalition Support Fund of the US as some of the pointers to possible threats to future of the rupee.

But all agree on one thing: local currency depreciation is nowadays a regional phenomenon though the underlying reasons for depreciation differ in gravity. For example, “If we talk in terms of our own fiscal year, whereas the rupee lost about nine per cent value in eleven months to May 2012, Bangladeshi Taka fell 10.5 per cent, Sri Lankan declined by 20 per cent—and above all Indian rupee witnessed the biggest depreciation of 25 per cent (against the dollar),” informed chief forex dealer of a bank citing exact closing exchange rates of these currencies as of end-June 2011 and of end-May 2012. “In such an environment, the recent loss in rupee value should not be analysed in isolation.” —Mohiuddin Aazim