THE State Bank says in its latest monetary policy announcement that the foreign exchange markets are stable and attributes this stability to rising reserves.

Yet currency dealers are increasingly talking of a slide in the value of the rupee driven against the perceived wishes of the central bank.

There is little doubt that the rupee ought to be allowed to float, and equally that if it were, it would find a value somewhat below what it is currently at.

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But some of the shortages appearing in the currency markets, where dealers are reluctant to sell the dollar at stipulated prices in anticipation of an increase in its value in days to come, suggest there might be a mismatch between how the State Bank is reading the situation and how the markets are seeing it.

Before closing for the weekend, the dollar crossed Rs103 in the open market, before obediently coming down to below Rs102 again.

Perhaps there is a realisation settling in amongst the monetary authorities that an overvalued currency can do more harm than good, and they are describing the growing pressures on the currency as a stable situation.

Perhaps the pressures are a passing phenomenon, driven by uncertainties coming from the strong volatility in the stock market and the long weekend ahead on account of the national holiday on March 23.

We have no way of knowing. What is certain though is that the rupee will have to adjust at some point to a more realistic level as the dollar is expected to climb further in view of the approaching end of an accommodative monetary policy by the Federal Reserve.

Whether that happens gradually and permissively, or whether it is sudden will depend on the kind of stewardship the currency receives from the central bank.

We can only hope that the central bank will be able to be fully autonomous in its actions in that situation. But describing such a situation as stable raises more questions than it answers.

Published in Dawn March 23rd , 2015

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