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KARACHI, Oct 15: The State Bank had to sell $35-40 million dollars in the inter-bank market on Friday to support the rupee that sank below 60 a US dollar after more than two years on heavy dollar buying for payment of oil import bills.
The SBP intervention helped the rupee made a quick recovery and it closed at 59.78 a dollar at the end of trading hours after falling below 60 a dollar earlier in the day showing a fall of nine paisa in its value overnight.
Bankers said the SBP sold dollars in the market through two large local banks and a foreign bank. They gave various estimates of dollar selling by SBP but the most common estimate was $35-40 million. No official word was available from the central bank but central bankers privately confirmed that they had intervened in the market to stabilize the rupee.
The rupee has lost more than 2.8 per cent value since the start of this fiscal year in July chiefly due to widening trade deficit. Pakistan's trade deficit rose to $839 million in July-September 2004 from $144 million a year ago. As a result the rupee depreciated by 1.9 per cent during this period.
The local currency came under increased pressure this month as the market took the view that it would fall further and acted accordingly. The local unit has lost 53 paisa or 0.9per cent value within two weeks of this month and looks set to depreciate further despite occasional State Bank interventions.
A KEY FACTOR: Apart from the reasons stated above a key factor that continues to weaken the rupee is that the real negative lending rate has also led to higher imports with its negative fallout on the rupee. Weighted average lending rate in August was 5.08 per cent-far below consumer inflation of 9.25 per cent during that month.
The SBP is tightening the interest rates in a measured way to contain inflation without risking the economic growth but the fact that average banks' lending rates are still below inflation suggests that the central bank should now speed up this process. The market has started getting indications that the SBP is alive to this challenge and it may accelerate tightening of interest rates.
The strongest indication to this effect came on Thursday when SBP Governor Dr. Ishrat Husain warned the banks against reckless lending. "Reckless lending or optimistic forecasting that current low interest rates environment would remain unchanged in time to come is bound to get your institutions into deep trouble," he told a gathering of senior bankers the other day.
GOVT. BORROWING: This warning should alert the banks about the possible intentions of the central bank. "The governor has given the banks a clue to the possibility that the central bank may now move faster in raising interest rates," said head of a local bank while talking to Dawn. "But it seems that the government appetite for cheap bank borrowing has so far compelled the SBP from raising interest rates appropriately." This view is widely shared in the banking community.
But central bankers insist the real reason for raising interest rates in a measured fashion is to help the economy grow at the targeted pace though they admit this has helped the government borrow excessively from the banks at cheaper rates. The government borrowed Rs52 billion from banks in just two months of this fiscal year against the full year target of Rs45 billion.
FORWARD RATES: Demand for forward dollars has been rising constantly in response as the rupee continues to weaken thus forcing it to fall further. Senior bankers said that on Friday that six-month forward dollars were selling at 75-80 paisa over their spot value adding that many importers bought forward dollars at this rate.
SBP INTERVENTION: Sources close to the SBP said the central bank would make more forceful interventions in the days to come to stop the rupee from falling further.
They said the central bank would not allow the rupee to slip through the psychological barrier of 60 a US dollar. The central bank has allowed a gradual fall in the rupee value to benefit exporters but it has kept it from falling too sharply through interventions. So far these interventions have been modest in nature.
