The rupee has increased by 1.35 percent since earlier this week, when it hit a record low of 307.25 to the dollar in the interbank market as part of a NATIONWIDE military-backed campaign against illegal foreign currency trade and smuggling.
In addition to closing down unlicensed currency businesses and detaining numerous people suspected of engaging in illegal foreign exchange transactions, the authorities have sent security personnel in plainclothes to money exchanges to keep an eye on dollar purchases. The open market rate has started to converge with the interbank rate, and the hundi/hawala players are thought to have disappeared.
On the open market, there are more dollars available. Since the retail price of the dollar has fallen below its official rate, those who had purchased dollars to protect themselves against exchange losses are likewise selling their stock. Exporters are turning to the interbank market to have their export bills discounted, and bankers claim that remittances made through official banking channels are getting better.
The State Bank has pushed banks to strengthen their involvement in the retail foreign currency market and has implemented considerable structural reforms to consolidate exchange businesses and their franchises. All is well thus far.
However, given that the underlying economic fundamentals are unaltered, it is now unknown if and for how long the rupee will maintain this pace. Furthermore, it is unclear when the currency rate will stabilise. People have good reason to be suspicious about the long-term effects of the campaign against illegal money changers and smugglers.
In 2021 and 2022, similar programmes were also introduced. Because administrative measures can only be effective to a certain extent, the feeling always changed in a matter of weeks or months. It is likely that volatility will return to the foreign exchange market unless official and private capital inflows grow, inflation declines, business confidence improves, and electoral uncertainty disappears. Then, a year prior, Ishaq Dar, the finance minister, made the same error.
Instead of using force like the military can, he put pressure on exchange businesses and put limits in place through the State Bank to limit outflows. How long will the rupee’s improvement last? To maintain any improvement in the exchange rate, it is crucial to address the fundamental problems causing the steadily worsening balance of payments and persistently high fiscal deficit.