KARACHI: The rupee depreciated sharply against the US dollar on Monday to cross Rs103, prompting the State Bank (SBP) to call banks in a meeting to stop further devaluation.

Currency dealers in the inter-bank market said the pressure is mounting on the demand for dollars. They said the exchange rate is in the grip of political uncertainty.

The dollar has gained about four per cent against the rupee during the past 10 days, creating fear of a reverse spiral that may devalue the local currency to Rs110.

The government earlier miraculously succeeded in bringing back the greenback from Rs110 to Rs98 within months. However, the ongoing political crisis has unnerved importers. The situation suited speculators who entered the market to manipulate it to their interest.

Sources said the SBP invited treasurers of banks and discussed the situation.

“What banks can do is to drop the dollar rate and hold back the dollars in their coffers,” said Atif Ahmed, a currency dealer in the inter-bank market.

The State Bank is used to influence the exchange rate through different banks. However, for the last few months there were no signs of it as the dollar rate was stable while reserves were going higher.

SBP’s reserves have been falling since the first week of this month, but are still over $8.9bn, reasonably high in the light of recent past experience.

Atif said the Tom value (next day-Tuesday-value) of the dollar dropped to Rs102.85 while Monday was closed at Rs103.20. This was because of the outcome of the meeting, he said.

Monday witnessed sharpest cut in the rupee’s value as it lost Rs1.55 per dollar. Dealers said the chances for the local currency are bleak on Tuesday, too, and it may loss another Rs1.

“There were a lot of payments in the system on Monday. The political uncertainty made matters worse. The rupee has already lost 4pc in 10 days; some positive news on the political front is desperately needed to arrest this free fall,” said Eman Khan of Aerari, an application that tracks currencies.

The trading in the open market was almost the same like in the inter-bank market and the dollar kept fluctuating around Rs103. However, it also fell below that level after news that the SBP has asked banks to tighten grip over exchange rate.

Published in Dawn, August 26th, 2014