In May 2007, the State Bank continued dollar buying and selling in inter-bank market. But bankers say it is difficult to ascertain whether it ended up as a net buyer or a net seller of foreign exchange during this month.

The central bank said in its third quarterly report that between July-April FY07 it was a net seller—and its net selling stood at $433.1 million. This was, however, less than one third of its net selling of foreign exchange worth $1.6 billion in July-April FY06.

For past several years, SBP has remained a net seller of foreign exchange to keep the rupee stable at a certain level, which has made the International Monetary Fund uneasy. The Fund has pointed fingers at this practice and even demanded that the rupee be allowed to find its real worth through interaction of the market forces. But the central bank insists that its interventions in the market are meant to “smooth out the volatility in exchange rates.”

If a net injection of $433.1 million were not made in the inter-bank market in ten months to April 2007 the rupee would have lost more value to a dollar than it actually did. The rupee lost 0.8pc of its value to a dollar in July-April FY07, coming down to 60.65 a unit on April 30, 2007 from 60.16 on June 30, 2006.

The rupee lost eight more paisas last month and closed at 60.73 a dollar on May 31. This brought its cumulative losses against the greenback to a little less than one per cent in eleven months of this fiscal year.

Interest rates softened last month, and the benchmark six-month Karachi inter-bank offered rate closed at 10.10pc on May 31 down from 10.23pc on April 30.

In eleven months of this fiscal year, the six-month KIBOR saw half a percentage point increase—from 9.61pc at end-June 2006 to 10.10pc at end-May 2007.

Bankers say heavy inflows of foreign exchange towards the end of the last month also raised the liquidity levels. The issuance of the $750 million Eurobond alone added Rs45 billion into the banking system. (And its direct proceeds raised the foreign exchange reserves well past $14 billion). On many occasions during the last month banks had to borrow overnight funds from SBP at a prohibitively high interest rate of 9.5pc.

The central bank kept the money market tight to curb inflation that rose 7.9pc in July-April FY07 against the full year target of 6.5pc. During July-May FY07, the cut-off yield on the benchmark six-month treasury bills also rose by 41 basis points, from 8.49pc at end-June 2006 to 8.9pc at end-May 2007.

The yields on T-bills may continue to rise. This is all the more likely because the SBP has indicated to check inflation through better liquidity management and piecemeal increases in T-bills rates rather than a one-time huge increase in its policy rate. Central bankers say that if SBP exercises the second option that may stifle growth sentiments.

Bankers say that the spill of liquidity crunch eased somewhat on June 1 when overnight-lending rates softened to 5-6pc after a long time. And this happened despite an outflow of Rs15 billion through a one-day open market operation of the State Bank. The central bank siphoned excess funds at the rates ranging between 5.5-7.75pc.

Meanwhile, bankers and businessmen got a strong clue on June 1 about why banks slowed loan disbursement during January-March 2007. The SBP data on the weekend showed that non-performing loans net of provisioning rose 2.28pc in first quarter of 2007 from 1.84pc in the last quarter of 2006.

The gross volume of non-performing loans (without provisioning) shot up to Rs197.8 billion from Rs186.4bn, showing a much higher growth rate of six per cent.—Mohiuddin Aazim