Dear members,
i am confused about relationship between rise in oil prices and rupees devaluation. Its tough to understand that why only Pak rupees react in such an adverse way to oil prices. What mechanics works behind this. Can anyone help me?
no direct relationship as such. Its jsut that Pakistan has a huge trade deficit, and our exports are very low. The dollars that we get as a result of exports is small compared to the dollars we have to pay for our imports. Bottom line, we need dollars, and cannot afford to let go of whatever little we get in the form of our export bills.
if the ruppee appreciates in value against USD, that will increase our export bill for the buyer, and if that happens, we risk losing that client to a cheaper alternate, like china or india.
So in order to 'retain' our exports, the state bank manipulates the exchange rate for rupee, to ensure that it doesnt appreciate by too much against the dollar.