The surprising fall in the value of the rupee on July 5 and the way the federal government reacted to it have raised several questions.

A massive 3.1 per cent decline in rupee’s value (down to Rs108.25 to a dollar from Rs104.90 a day earlier) and that too in a single session surprised even those who believed that the local currency was overvalued.

But then, technically speaking, there was nothing wrong in the depreciation. It’s up to the central bank to let the rupee fall in one go or in instalments.

For those who keep an eye on the forex market and regularly interact with bank treasuries, it was not a secret that the State Bank of Pakistan (SBP) had left the rupee to find its market-based value on that particular day.

But at the close of day, the central bank itself made the move known to all by issuing a press release in which it first announced the extent to which the rupee had depreciated and then linked the exchange rate adjustment to the rising external account deficit.

The press release claimed that the “depreciation in the exchange rate will address the emerging imbalance in the external account and strengthen the growth prospects of the country.”

The issuance of the press release served one big purpose: It put to rest speculations of all sorts aired on electronic media throughout the day in relation to the sudden rupee slide.

Ideally this should have opened up a debate whether the rupee was really that overvalued and what the rationale was to depreciate it in one go.

“Will the rupee be allowed to decline once again since the SBP had said that the Rs108.25/dollar exchange rate was broadly aligned with economic fundamentals?”

“Even if the government had any reservations about the manner in which the SBP had acted, that should have been sorted out behind closed doors,” says a former deputy governor of the SBP.

Instead, the Ministry of Finance chose to issue a strong-worded press release that said that “the current political situation is being exploited by certain individuals, banks and entities resulting in the artificial rise of the interbank rate of the US dollar against the Pakistani rupee.”

“The finance minister was simply annoyed over why the central bank didn’t intervene in the market to defend the rupee’s slide,” says another former central banker.

“Later developments, (the bankers’ summit at Finance Minister Ishaq Dar’s office, and his hint that the move to allow rupee depreciation was the acting governor’s arbitrary decision) should also be seen in the same light.”

The rupee was obviously overvalued. Not only had the IMF said so, but indices used for determining the overvaluation had established the fact.

“Banks were convinced that our currency was overvalued and an adjustment was overdue. They were anticipating such an adjustment for some time but never thought it would come in this way,” says the head of a local bank.

Sources in the Ministry of Finance say the 3.1pc decline in the rupee’s value (initially triggered by an unusually big forex payment reportedly related to the acquisition of NIB Bank by MCB Bank) could have been avoided.

They say even if the SBP was set to readjust the effective trading band of the rupee against the dollar it should have done this in piecemeal fashion and not in one go so as to avoid a negative impact on the economy.

“Now that a full-time governor of the central bank has been named and the rupee regained 1.5pc in value the very next day, things should come back to normal,” one of the sources said.

(According to banking sources, the rupee recovered on July 6 on dollar selling by at least two leading local banks).

Bank treasurers, however, want to know whether the new effective trading band of the rupee — Rs105.50 -Rs106.00 per US dollar (after the1.5pc recovery on July 6) — is truly at the level at which the central bank would defend it under its managed float exchange rate system.

“Or, will the rupee be allowed to decline once again by 1.5pc or so, as the SBP said on July 5 that the then exchange rate (Rs108.25/dollar) was broadly aligned with economic fundamentals,” wonders the chief forex dealer at a local bank.

When the SBP had referred to “the emerging imbalance in the external account” in its press release, markets knew what the central bank was talking about — a doubling of current account deficit amidst very little hope of an immediate improvement.

“So we should not overrule another downward adjustment in exchange rates as long as external sector fundamentals don’t improve significantly. And, economic fundamentals don’t change overnight.”

Published in Dawn, The Business and Finance Weekly, July 10th, 2017