Currently, the SBP maintains a narrow band by controlling the supply and demand of dollars till it decides to redefine the band as it has practised a few times this year. Instead of redefining the range on any arbitrary day, it should be done on a set date as is the case with monetary policy.
This step would remove the uncertainty from the system enabling the businesses to plan accordingly.
Desired depreciation every month on a set date as long the current account numbers are not to the satisfaction of the policy makers is the best way to achieve the required exchange rate parity without creating panic. Gradually depreciating the rupee per month will not encourage dollarization or any other sort of hoarding as the cost of such steps outweighs the benefits. He said that the Association completely understands that rupee depreciation is an important step to curtail the spiraling current account deficit. It is an unpopular decision for any democratic government because it leads to inflation which results in higher discount rate thereby curtailing demand.
The government has shown maturity by taking a difficult decision to put the economy on the right track.
However, SAI does not agree with the method used by the government as large, arbitrary fluctuations in the dollar rate result in uncertainty which creates distortions in the market system. If we take last day's examples where some unfortunate importers bought dollars at 144 whereas the closing rate was 139 resulting in unnecessary losses.