December 04, 2007	Tuesday	Ziqa'ad 23, 1428

KARACHI, Dec 3: The State Bank in a major move to ease pressure on dollar demand has slashed the Special Cash Reserve (SCR) requirement to five per cent aimed at improving supply of US currency in the interbank market.

The local demand for US dollar has been rising for the last two weeks following steep rise in international crude oil prices building pressure on the rupee which has so far lost a significant weight against the greenback.

“It has been decided to reduce the Special Cash Reserve requirement from 15pc to 5pc of total FE-25 deposits with immediate effect,” said a SBP circular issued here on Monday.

Currently the banks and development financial institutions (DFIs) are required to maintain cash reserves in US$ equivalent to not less than 20pc of their total FE-25 deposits on daily basis with the SBP. They maintain five per cent Cash Reserve Account (US$) and 15 per cent Special Cash Reserve Account (US$).

The US dollar had gained more than 50 paisa against the rupee in a couple of weeks on rising demand for the greenback. The rush of importers was making the situation even worse despite the fact that the inflows of foreign exchange in the form foreign direct investment and remittances did not see major change.

Banks and DFIs will now be required to maintain as five per cent each in Cash Reserve Account (US$) and Special Cash Reserve Account (US$) in US$ equivalent of their total FE-25 deposits on daily basis with the SBP.

“This new Special Cash Reserve requirement is being changed temporarily to provide liquidity comfort to banks and the same will be reviewed by February next,” said the SBP.

Bankers said that premium on the rupee-dollar swap would improve with this decision. Banks usually sell dollar to raise liquidity and buyback in future on premium. The premium was hovering at a much lower level.

Analysts said with this major cut in the dollar reserve requirement, the market might see some gain by the rupee against the dollar. On the other hand, the world crude prices have also started sliding which would help to ease pressure on Pakistani importers busy to book dollar as much as possible.

The exchange rate is facing a unique phenomenon in Pakistan as the rupee is falling against the dollar which itself is fast falling against the major international currencies. Analysts said it was the weakness of the economy which started appearing in terms of weakening of the rupee.

They also maintained that the record $16 billion reserves were vital against the ‘free fall’ of the rupee as the State Bank did not allow any panic in the market and kept pumping dollars to maintain a balance in the exchange rate.

“The foreign exchange reserves are proved a key in this new rupee-dollar relation. It could produce serious threat for the economy if the reserves were not at this level,” said another analyst.