Playing the devil’s advocate

The Monetary Policy Committee met last week and decided to increase the policy rate by 100 basis points. Market activity began to respond to this development and the dollar began its rally against the rupee. The dollar had vacillated in the Rs217 to Rs222 range since Ishaq Dar became the Finance Minister. While that range had been broken through a couple of weeks ago, the intraday change on the 26th of January conveyed an unreal sense of elasticity between the policy rate and the price of the dollar. While the discipline of economics doesn’t suggest a direct causal relationship between currency valuation and policy rates, the perception was that speculative activity in the exchange markets started as investors saw the policy rate hike as the government’s desperate attempt to put the shaky International Monetary Fund (IMF) programme back on track. The dollar surged and surged even higher in the intraday to script one of the highest rallies of the US currency against its Pakistani counterpart. The dollar rallied to Rs263 from 230.89 at the close of the previous trading day.