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Currency dealers see ‘exchange rate bubble’ set to burst

Currency dealers see ‘exchange rate bubble’ set to burst

KARACHI: The exchange rate has been stable for more than 100 days now, but experts in the inter-bank market see a bubble that may burst in the next two months, experts and currency dealers said.

Experts see no demand for the US dollars in the open market, but are of the view that primary dealers in the inter-bank market are under pressure from the State Bank to keep the exchange rate stable.

The dollar has been maintained at around Rs104.60-70 for more than three months as the government perceives it to be politically valuable. In 2015, the greenback crossed Rs106 in the inter-bank market at one point.

“We are not sure how long the current exchange rate will prevail, but a bubble is too visible to ignore,” said Atif Ahmed, a currency dealer in the inter-bank market.

Some monetary experts believe the country’s record foreign exchange reserves of over $20.8 billion are enough to keep the exchange rate under control. Exporters have been seeking devaluation of the rupee, but they have failed to convince the finance minister, especially after a disappointing exports strategy which resulted in falling proceeds.

“I believe the possible devaluation is expected in the next fiscal year,” Mr Ahmed said, adding that smooth inflows of remittances and donor agencies have helped the country so far to keep the exchange rate at the current level.

Some independent economists also believe the rupee is overvalued.

In the last more than two years, the exchange rate has witnessed massive fluctuations, with the dollar going up to as high as Rs108-09 and then falling to below Rs98. The managed devaluation of the dollar could not sustain for longer period and it started rising again. However, the government stepped in once again put brakes to its rally.

“We have no pressure and no big demand for dollars,” said Anwar Jamal, a currency dealer in the open market. He said the exchange rate could see a change with the beginning of Ramazan.

“Hundreds of thousands of people will leave for Umrah in the holy month of Ramazan. They need foreign exchange, both dollars and riyals. This demand could bring change in the exchange rate in favour of the greenback,” said Mr Jamal.

However, they say any major change in the exchange rate is influenced by the inter-bank rate. There is always a gap between the rates of open market and inter-bank market. The gap stands at Rs0.85 per dollar at present.

Currency dealers say the open market is the reflection of inter-bank market which is being managed or influenced as per the government policy. They said pressure could mount once the inter-bank market sees a change in the exchange-rate equilibrium.

Experts believe that falling oil prices was another major reason for the stable exchange rate. The country has saved more than $3 billion on imports of petroleum products during the first eight months (July-February) of this fiscal year due to low oil prices.

The private sector, which is responsible for oil payments, buys dollars from the inter-bank market which helps the US currency to appreciate.

Published in Dawn, April 17th, 2016

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