KARACHI, Aug 2: The rupee on Monday shed 10 paisa against the US dollar in the inter-bank market as corporates went for heavy forward buying of foreign exchange to avoid exchange rate loss in case of further depreciation of the rupee.

The State Bank put the closing exchange rate of the rupee at 58.54 to a US dollar up from 58.42 on Saturday. But bankers said the rupee hit as low as 58.58 a dollar when most banks were shopping around to buy dollars for their customers.

Bankers said that forward premium for six months shot up to 44 paisa per dollar from 38 paisa on Saturday as both industrial and commercial importers made a beeline at banks for forward buying.

Of late importers have made heavy forward dollar buying for six months because they fear that the rupee may continue to fall. The fear is not unfounded. Late last month, the State Bank also indicated in its monetary policy statement for July-December 2004 that the exchange rate may remain under pressure and the interest rate may rise during this period.

The trade policy statement for this fiscal year, unveiled in the last week of July, also said that the objectives of the policy could be achieved if exchange rates remained competitive.

And earlier, Finance Minister Shaukat Aziz had stated in his budget speech that the government would keep the exchange rate competitive. All this put together alarmed corporates and commercial importers and they took the view that the rupee may weaken particularly in the first half of this fiscal year, said a dealer at a foreign bank.

Since the beginning of the fiscal year in July, the rupee has lost 42 paisa or 0.7 per cent of its value against the US dollar on increased demand for foreign exchange.

The demand for the dollar has been on the rise primarily due to widening trade deficit amidst higher outflows due to government and corporate debt-payments. At end-June the rupee traded at 58.12 per dollar but it gradually fell to 58.54 on August 2.

How fast the demand for the dollar has increased during this period, is evident from the fact that six-month forward premium that was around minus four paisa per dollar by the end of June shot up to 44 paisa on Monday.

Data for trade deficit in July would be out sometime next week but top bankers estimate it to range between $300-$400 million because of historically high oil prices and rising import of plant and machinery etc.

In the last fiscal year, Pakistan saw a trade deficit of $3.2 billion that was a key factor behind 0.5 per cent depreciation in the rupee value. The government has projected $3 billion trade deficit for this fiscal year but indications are that it may reach $3.6 billion or so.

Some bankers said the rupee came under pressure on Monday also because of heavy dollar buying by a large local bank possibly for making some government debt payment.

They said another factor that fuelled pro-dollar sentiment was that Pak Arab Refinery Co (Parco) is due to pay back to a consortium of five banks $100 million that the banks had arranged for the company as part of a $350 million rupee-dollar swap to enable it to repay ahead of schedule a Japanese loan. Treasurers at a couple of banks said the State Bank may ask Parco to rollover this $100 million swap with the consortium of banks to ensure that the rupee does not weaken further.

But banking sources say Parco was unlikely to go for rolling over the swap because it can cause financial loss to the company due to falling value of the rupee.

Bankers said banks received desperate calls from the Exchange & Debt Management Department of the State Bank advising them to slow down dollar buying but most of them could not oblige because they were purchasing dollars for their customers.

They said it was difficult to ascertain if the central bank had sold dollars to boost rupee as, according to them, there were no signs of a significant intervention by the State Bank.

Sources close to SBP said the central bank was in no mood to reverse the rising trend of the dollar because it fits well into a broader economic strategy adding that SBP only wanted to slow down the pace of the rising dollar.

The SBP seems set to allow the rupee to fall gradually to benefit exporters who have started feeling the pinch of rising interest rates. The central bank is allowing a gradual rise in interest rates to contain soaring inflation.

Sources close to SBP said the loss of 42 paisa in the rupee value since the start of July fits well into the stated policy of the economic managers to keep the exchange rates competitive. The Indian rupee, for example, has also lost 38 paisa during this period coming down to 46.36 a US dollar on August 2 from 45.98 a dollar at the end of June.