The fall of the rupee on the interbank market to Rs 299 to the dollar means that the rupee is about to cross the psychological barrier of Rs 300 very soon. It has already crossed that barrier on the open market, where the rate reached Rs 312. The rupee still seems to need reining in, as the gap between the interbank and open-market rates is not staying within the range demanded by the IMF. It seems that that very mechanism is causing the trouble. It must be remembered that when the dollar crossed Rs 200 not so long ago, it was predicted that it would go past Rs 300. Already, there have been voices, even before the breach of Rs 300 a dollar, that Rs 400 is coming up.
That leads to speculative pressure on the rupee, and a situation where the buyer, genuine and speculative alike, has to go to the open market, and even the hundi market, in search of dollars. The government then tries to maintain the gap allowed by the IMF between interbank and open markets, and lowers the rate. Speculators are proved right, and other investors try to jump on the bandwagon. Those who bought at Rs 200 in the belief that the rupee would reach Rs 300, now hear it will drop further, and will hold on to what they have. As for those with a genuine need of dollars, importers find that the interbank simply refuses while open-market dealers are charging hefty premiums. Even the interbank market seeks ways to charge premiums, because the banks do not want to have to honour pledges to buy at a lower rate than the market.
The inability to bring down the value of the rupee means that inflation is not going anywhere soon, as the inflation the country is suffering from is not going to be tamed anytime soon. That means the caretaker government may well have already squandered, in a week after its takeover, the caretaker government may have squandered the financial stability won at such great cost by outgoing Finance Minister Ishaq Dar. Though the need for the Stand-By Arrangement remains, there must be something left of the wreckage of the economy if the elected government is to negotiate a fresh package.
