THE finance minister is on record saying that as per his calculation, the actual value of rupee is below Rs200 to a US dollar, but the market is rejecting his claim, for the current value of dollar has a massive gap in the interbank and open market rates.

Importers have been facing difficulties in opening letters of credit (LCs) due to shortage of dollars in the banks and travellers who need dollars for their overseas journey are complaining about scarcity of dollars in the open market.

I do not see any economic wisdom in keeping the rupee overvalued. It appears that the government wants to keep the value of rupee higher than its actual market value for political reasons.

I think that keeping the rupee higher than its actual value by imposing various curbs on imports and banks, etc., is damaging for country’s economy. Overvaluation of rupee is hurting exporters because they are converting their dollars at overvalued rate and getting less local currency. Overvalued rupee also makes imports artificially cheaper than locally produced substitute products, which means dampening investments and jobs in sectors that can produce locally as they have to compete with imported goods.

Overvalued rupee is also discouraging foreign direct investments (FDI) because local assets, like land, building, etc., become costlier. Overvalued rupee is discouraging home remittances through interbank or official banking channels because the premium being paid by non-banking channels is way more attractive. An overseas worker is tempted to send home remittances by unofficial channels.

Thus, the overvalued rupee is shrinking supply of dollars in banks as well in the open market. The government should accept market reality regarding the value of rupee which is losing ground because of a variety of reasons.

In today’s technological advanced world, the governments cannot keep currency at their desired value because markets are more efficient than the governments.

The government should review its exchange rate policy and let market forces decide the matter. This will be good for the country and its economy.

Ejaz Ahmad Magoon
Doha, Qatar

Published in Dawn, February 15th, 2023