The rupee is more than just a medium of exchange – it’s a mirror of the nation’s economic discipline, political credibility, and structural resilience. Yet, for too long, Pakistan’s exchange rate has danced between artifice and panic, managed behind closed doors and misunderstood in public debate. As of mid-2025, with the currency trading around Rs?283 to the US dollar, the conversation once again centres on whether the rupee is being artificially suppressed, unjustifiably floated, or aligned with actual fundamentals.
Strip away the noise, and a clearer picture emerges: Pakistan’s rupee is not free-falling, nor is it floating blindly. Multiple indicators now suggest that it is undervalued – modestly, but meaningfully. When we combine key benchmarks like the Real Effective Exchange Rate (REER), Purchasing Power Parity (PPP), current account balance, institutional analyses, and market expectations, the conclusion becomes unavoidable. The fair value of the rupee as of mid-2025 is approximately Rs?250 to the US dollar, with a justified range between Rs?240 and Rs?260. The actual rate exceeding Rs?280, therefore, reflects caution more than chaos.
Let’s start with what the REER tells us – the rupee’s value compared to a trade-weighted basket of currencies, adjusted for inflation. The REER currently stands around 96.6, just shy of the 100 benchmark that economists use as a neutral reference point. In simple terms, this means the rupee is slightly cheaper than it was in 2010 in real terms – a mild undervaluation that supports exports but keeps imports relatively expensive. For a country like Pakistan, which needs to nurture domestic industry and curb unnecessary imports, this isn’t a bad place to be. It’s strategic, not accidental. However, REER alone does not capture capital flows or structural rigidities, and its utility as a sole metric is limited when speculative sentiment dominates.
Then comes the purchasing power lens. The Big Mac Index, long treated as a layman’s proxy for PPP, shows that the rupee is over 30% undervalued compared to the US dollar. This implies the rupee’s domestic purchasing power is far greater than its global trading value. Even adjusted for income differences and regional economic disparities, the rupee appears undervalued by around 20%, with implied fair-value exchange rates clustering between Rs?230 and Rs?250. These simplified metrics aren’t gospel, but they underscore an essential point: the rupee’s weakness is not rooted in inflation or productivity alone – it is as much about investor perception, policy inertia, and confidence shocks.
And what do institutions say? The International Monetary Fund (IMF) has carefully avoided pegging a precise number but has emphasised the importance of a market-determined rate. The Fund’s recent reviews show greater concern for fiscal reform and SOE restructuring than for rupee volatility. Their main concern has been overvaluation in the past – notably in 2017-2018, when a stubbornly pegged rupee (around Rs?105) led to a ballooning current account deficit and an eventual crash. That bitter episode taught policymakers that artificially managing the currency in the face of imbalanced fundamentals results in costly corrections. The State Bank of Pakistan (SBP), too, has steered clear of numerical targets but clearly prefers a REER just under 100, hinting that a slightly undervalued rupee is part of its long-term competitiveness strategy.
Private-sector economists, however, are less reserved. Tola Associates pegs the rupee’s fair value around Rs?249, based on current account trends and monetary projections. Bloomberg Economics placed it at Rs?244, and Goldman Sachs – using its own fundamental equilibrium models – estimates that the rupee is about 20% undervalued, suggesting a justified rate near Rs?230-240. With the current account virtually balanced, inflation now in the 8-9% band, and foreign reserves climbing above $14 billion, the fundamentals do not support a Rs?283-dollar, not under conditions of policy continuity and macroeconomic prudence.
So why does the rupee remain weaker than its fair value? One answer lies in precaution. Pakistan’s central bank has deliberately built reserves by buying dollars when the rupee gained strength, softening appreciation. This ‘leaning against the wind’ approach helps avoid overcorrecting into a new overvaluation. The SBP has learned from the past – sudden rupee appreciation, if followed by policy reversals or external shocks, damages credibility. By maintaining a “managed float” with strategic interventions, the SBP ensures both competitive advantage and foreign reserve buffers. However, it must ensure this management does not drift into manipulation, which could trigger investor mistrust and FATF scrutiny.
Another key factor is market psychology. After years of repeated devaluations, missed IMF targets, and political instability, the rupee still carries a risk discount. Investors – both local and foreign – factor this into their pricing models. Until foreign direct investment rises significantly, governance improves, and long-term credibility is rebuilt, this perception-driven undervaluation may persist. In many ways, the rupee today is a casualty of reputational damage more than a victim of structural collapse.
However, a policy-induced undervaluation also carries serious risks. While it helps exports in theory, Pakistan’s export base is shallow, overly reliant on textiles and rice. A too-weak rupee, if not matched by productivity gains, simply stokes inflation and worsens the burden of external debt. A one-rupee depreciation against the dollar raises the rupee cost of debt servicing by billions. And indeed, the public continues to bear the brunt of imported inflation – particularly in food, fuel, and medicines. Allowing the rupee to appreciate modestly toward its fair value can ease domestic inflation without damaging external competitiveness, especially now that the balance of payments position is stabilising and reserves are improving.
A stronger rupee also strengthens the purchasing power of citizens. While economists may celebrate depreciation as a tool to curb imports or boost exports, ordinary people experience it as a blow to their wallets. Education, health care, transportation, and food – all imported or import-linked – become more expensive with every slide of the rupee. A currency that remains undervalued for too long hurts the poorest the most, especially in a consumption-heavy society like Pakistan.
The writer is a financial expert and can be reached at jawadsaleem.1982@ gmail.com. He tweets @JawadSaleem1982
