The State Bank of Pakistan made a modest dollar buying from banks during the week ending on May 5. Senior bankers said that the central bank bought less than a hundred million dollars from two large privatised banks and some foreign banks. Surely, the SBP did this to keep a lid on the gains of the rupee and also to build foreign exchange reserves.
Such dollar buying from the banks has helped the central bank keep the reserves above $13 billion. The SBP reported during the week under review that the country’s total liquid reserves stood above $13.66 billion on April 28.
Bankers said the rupee remained strong throughout the week adding that it witnessed the intra-week low at 60.67 a dollar but finally closed at 60.59 a dollar on Friday (May 4). But unlike on Thursday when SBP had bought tens of millions of dollars to keep the rupee from rising further, it made no such buying on Friday.
In ten months of this fiscal year, the rupee has lost only 0.8 per cent of its value against the dollar—thanks to stable foreign exchange inflows and the SBP’s policy of supporting the rupee through net dollar selling in the inter-bank market. (The rupee fell from 60.16 at end-June 2006 to 60.65 at end-April 2007).
Bankers said they expected little movement in the exchange rate next week. “But what is crucial to watch is that whether the SBP would let the rupee gain further and break the barrier of 60.60 a dollar as it did on Friday,” said a dealer at a foreign bank.
If the central bank lets this happen, the rupee is sure to gain quickly against the dollar in the next week on strong inflows of foreign exchange exports, workers’ remittances and foreign investment.
Bankers said that during the week under review the state-run National Bank received over six billion rupees from Oil and Gas Development Corporation as dividend paid to thegovernment of Pakistan. That had a positive impact on NBP’s liquidity briefly but when it actually transferred the amount to the government account, it ran short of liquidity and had to borrow from the SBP discount window at 9.5 per cent.
Very modest liquidity levels were seen in the inter-bank market throughout the week with overnight call rates hovering above nine per cent. There was no auction of treasury bills or PIBs during the week and the SBP also conducted no open market operation or OMO.
Bankers said banks facing liquidity shortage managed to borrow from other banks throughout the week except on Friday. Since banks are supposed to average out any shortfall in their weekly mandatory cash reserves on Friday, banks needing cash have to turn to SBP. That exactly happened on Friday, May 4, also when they had to borrow Rs14.35 billion from SBP discount window.
Bankers said that interest rates might soften a bit next week and overnight call rates might range between 8.5-9 per cent. The inter-bank market is expecting an inflow of Rs5.9 billion through maturity of treasury bills and the central bank is due to conduct a fresh auction of T-bills as well.
During the week under review, some banks were seen trading in PIBs in the secondary market but the trading volumes remained thin and the yields a bit lower than the officially set yields on April 21.
Meanwhile, the State Bank reported on May 2 that the spread between average lending and deposits rates of all banks stood at 737 basis points at end-March 2007. (Average lending rate was 11.29 and average deposit rate 3.92 per cent).
This means that in nine months of this fiscal year, the spread has seen a nominal squeezing as it stood at 751 basis points at end-June 2006. (Average lending rate then was 10.40 per cent and average deposit rate 2.89 per cent).
Senior bankers say that the gap between lending and deposit rates may squeeze further for April 2007 chiefly due to a declining trend seen in KIBOR last month. Many of them say they expect 10-15 basis points compression in the banking spread.
On May 1, the SBP reported that the volume of non-performing loans of all banks and development finance institutions recorded a decline of Rs1.6 billion between July-September 2006. (The NPLs went down from Rs189.4 billion to Rs187.8 billion). A bigger fall was seen in net NPLs or NPLs without provisioning that went down from Rs48.3 billion to Rs43.8 billion during this period.—Mohiuddin Aazim
