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Falling rupee

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LET’S start with a basic truth: a depreciation in the exchange rate is not the end of the world. Nor is it, by itself, a sign of a calamity. Exchange rates fluctuate normally in almost all countries. In some cases, the movements are driven by local factors (such as the strength of the balance of payments), and in other cases by global factors (such as if the dollar should strengthen against global currencies because of rising interest rates in the US).

So the problem today is not so much that we have had four rounds of currency depreciation since last July. The problem is that since March 2014, when former finance minister Ishaq Dar managed to get the exchange rate up to Rs98 to a dollar, from where it gradually slid to Rs105 till his departure, the country was basically operating under a managed exchange rate regime. That invisible peg was gone once Mr Dar was pushed out of office, but by then the inevitable imbalances had built up to unmanageable proportions.

Keeping the exchange rate imprisoned within a narrow band is very bad economic policy.

For perspective, take a look at what happened next door, in India, during the same years. In 2013, when the PML-N government came to power, the India rupee was at INR58 to a dollar. Today it is at INR67.6 to a dollar, having touched a peak of INR68 to a dollar at the end of May. But a surprise hike in the key policy repo rate in early June gave it a little more........

© Dawn