KARACHI, Aug 7: Whereas Pakistani rupee or PKR lost half a per cent of its value against the US dollar in July, the depreciation in the Indian rupee or INR value was just double.

Pakistani rupee closed at 58.42 a dollar at the end of last month, down from 58.12 at the end of June, showing a fall of 30 paisa or 0.5 per cent. The Indian rupee closed at 46.45 a dollar at end-July, down from 45.98 at end-June depicting a decline of 47 paisa or one per cent.

Senior officials of the State Bank say a steeper fall in PKR value so far this month should be seen in this context. In the first week of August, PKR further lost 46 paisa or 0.8 per cent value against a US dollar but the INR rather gained two paisa.

Thus since July 1, 2004 till date, the PKR depreciated by 1.3 per cent against the dollar, slightly higher than the one per cent depreciation in the INR value. The SBP officials say this should help Pakistani exporters compete well with India in the world export markets.

Pakistan and India jealously defend their respective exchange rates against becoming less-competitive as their exporters compete in many markets of common commodities like textiles and rice.

As financial year begins in July in Pakistan, the State Bank becomes a bit more alert about the exchange rate factor in general and shows increased sensitivity to movements in INR and other regional currencies. At the beginning of Indian financial year in April, the Reserve Bank of India too responds more swiftly to the market expectations in the foreign exchange regime.

But both central banks do make serious efforts throughout the fiscal year to guard their currencies against becoming less- competitive.

The amount of success they achieve depends largely upon how much room their economic fundamentals provide in a particular financial year to let their currencies rise or fall. The SBP let the rupee depreciate by only 0.5 per cent in the fiscal year 2003 -04 to avoid the economic ills that a higher depreciation could have produced including an upsurge in imported inflation.

What made it possible was that Pakistan's overall balance of payment situation was comfortable despite a three-fold increase in its trade deficit that soared to $3.2 billion.

Since Pakistan and India follow different financial years it seems more appropriate to analyze their exchange rates movements on the basis of calender years. In the first seven months of 2004, PKR lost 98 paisa or 1.7 per cent value against the dollar whereas INR shed 84 paisa or 1.8 per cent value vis-a-vis the dollar. This shows how seriously Pakistan and India keep their currencies competitive in relation to each other's.

But this exercise is becoming a pain in the neck for the SBP because Pakistan is liberalizing its foreign exchange regime much faster than India. This means it has to be more cautious while allowing its currency to depreciate than India.

But even under the given circumstances the SBP has been able to keep the rupee competitive for exporters without allowing volatility to hit exchange rate movements. Volatility in the exchange rates sets in motion a self-fulfilling prophecy cycle that in turn strengthens or weakens a currency - as the case may be - beyond manageable levels.

That explains the warning that SBP Governor Dr Ishrat Husain recently issued to speculators. Talking to newsmen at a function the other day he said that the recent shoot-up in the dollar value was partly due to speculative trading in currencies and that the SBP had moved to check it and would continue to do so in future.

During the first week of this month PKR once experienced an intra-day low of 59.40 after about two years not only because of genuine demand from importers but also due to speculative trading by many of them. This prompted the SBP to lift the rupee not only by selling dollars to banks but also by issuing serious warnings to both banks and top corporates engaged in aggressive dollar buying.