KARACHI, Aug 3: The rupee on Tuesday shed 25 paisa or 0.4 per cent of its value against the US dollar in the inter-bank market as banks increased dollar buying for their customers.
This was the sharpest fall the rupee witnessed in a single session after more than two years.
On Monday also the rupee had lost 10 paisa against the US unit on importers-led buying of dollars. Thus it has lost 35 paisa or 0.6 per cent of its value to a dollar within two days.
Higher demand for dollars due to soaring trade deficit has made the rupee shed 67 paisa or 1.1 per cent of its value against the dollar since end-June bringing it down to 58.79 a dollar from 58.12 on June 30, 2004.
Bankers said the rupee nose-dived to the new low primarily due to continued demand for dollars from importers as well as from corporates making debt payments. They said some banks that had exhausted their foreign exchange holdings also stepped up dollar buying to cover their positions.
These banks also bought higher amounts of dollars to clear oil import bills of their customers. Another contributing factor to the fall of the rupee was that a number of corporate customers of banks were not sure if Pak- Arab Refinery Co or Parco would pay off $100 million in second instalment of its $355 million rupee-dollar swap on Wednesday.
Such customers took the view that the dollar would eventually move up on Wednesday if Parco went ahead for paying off the swap instalment. But sources close to the State Bank told Dawn that the central bank had persuaded Parco to roll-over this swap instalment with the consortium of banks to help SBP in its effort to keep rupee from falling too sharply in one-go.
"Parco has reluctantly agreed to it," confirmed a source close to SBP. The company had entered into a $355 million dollar-rupee swap with a consortium of five banks to pay a Japanese loan ahead of schedule.
Bankers said the dollar buying pressure was so intense that the rupee traded at 58.90 in tomorrow value or value tom in banking jargon. This means that on Wednesday the rupee is likely to start trading at 58.90 a dollar.
They said whereas most banks bought dollars to meet the demand of their customers a few did so anticipating that the rupee would fall further. The State Bank also did not make a significant intervention to prevent the steep fall of the rupee.
Lately the central bank has let the rupee shed some weight to benefit the exporters who are bound to see their financial cost of business rising in the wake of a gradual hiking of interest rates.
SBP indicated in its monetary policy statement issued on July 21 that it would allow gradual weakening of the rupee along with a phased tightening of its monetary policy to keep inflation in check.
This policy statement has set in motion a sort of self- fulfilling prophecy cycle with the result that the rupee has lost 53 paisa or 0.9 per cent of its value to a dollar since then.
But even this self-fulfilling prophecy cycle has its roots in hard economic facts the first and foremost being the soaring trade deficit. In April-June 2004 Pakistan booked a huge trade deficit of $1.6 billion, more than half the total trade deficit of $3.2 billion in the entire fiscal year July-June 2003-04.
This reflected badly on the health of the rupee that lost 71 paisa or 1.2 per cent of its value against the US dollar in the April-June quarter. Figures for trade deficit of July is yet to pour in but bankers say that importers-led demand for dollars was unusually high last month.
Pakistan has projected $3 billion trade deficit for this fiscal year but actual deficit may be much higher as the economy is set to grow faster than in the last year. In 2003-04 the economy grew by an estimated 6.4 per cent. The growth target set for this fiscal year is 6.6 per cent.
The ongoing fall of the rupee is in line with the government policy of keeping the exchange rates competitive to help exporters meet an ambitious $13.7 billion target in this fiscal year.
Exporters need to be supported through a weaker rupee because a gradual hike in interest rates is going to add to their cost of production. Export refinance rate has already moved up by 50 basis points to 2.5 per cent this month in the wake of a similar increase in six-month treasury bills rate in July.
As a result the maximum mark-up on export financing has risen from 3.5 to 4 per cent. Given the fact that the central bank seems set to let the interest rates inch up further to contain inflation export financing would become costlier in the months to come. Consumer inflation or inflation measured by Consumer Price Index shot up to 8.45 per cent in June 2004 over June 2003.
Average CPI inflation in July-June 2003-04 stood at 4.57 per cent against the initial target of 3.9 per cent. Inflation rose past the targeted level primarily because the economy grew faster than the targeted pace (6.4pc against 5.3pc).
But as a huge build up in currency outside the banking system was also a key factor behind this big rise in inflation the central bank is trying to keep inflation in check since the beginning of this fiscal year by allowing interest rates to rise.
