KARACHI, Sept 21: A numbers of banks had to borrow Rs19.6 billion from the State Bank in two days as the central bank kept the inter-bank money market tight to contain the fall of the rupee.

The rupee closed at 59.07 to a US dollar after losing eight paisa in two sessions. But what is more important is that it fell below 59 a dollar level after twenty-three months.

The State Bank did allow the rupee to test new lows to make the exchange rates more market-driven and to help boost exporters' foreign exchange earnings in local currency.

Senior bankers said the central bank did not make any significant intervention in the market to keep the dollar from rising too high though it did sell a couple of millions of dollars in two days to dampen pro-dollar sentiments.

They said a number of local and foreign banks had to borrow Rs6.5 billion from the State Bank discount window on Monday and Rs15.1 billion on Tuesday to meet their daily cash requirements. Banks borrow from the central bank for up to three working days against government securities at 7.5 per cent - the SBP discount rate of repo rate that has remained unchanged since November 2002.

The banks had to resort to discounting of T-bills on two consecutive days as the inter-bank market had been short of liquidity. That was why overnight inter-bank lending rate was also hovering around 7.5 per cent.

As borrowing at such a high rate, in the backdrop of six-month T-bills normally yielding a 3 per cent return, created problem for the banks they were eagerly waiting for the central bank to inject extra liquidity through an open market operation.

But the central bank did not inject liquidity on Monday or Tuesday as that would have further weakened the rupee by increasing its supply. When the local currency is under pressure all central banks tend to keep the money market tight--i.e. if they do not want the local currency to fall beyond a certain level.

That is exactly the case with the State Bank as well. Though it has allowed the rupee to fall below the crucial level of 59 a US dollar it is trying to avert a big fall in the rupee value.

What exactly is the level to which the central bank would allow the rupee to fall is too hard to guess but senior bankers are anticipating that the SBP may defend the rupee at 59.20, at least for some time. The rupee has been on the fall due to rising trade deficit on the back of soaring oil prices in international market.

As the SBP endeavours to keep the money market tight to save the rupee from falling too sharply, not only overnight call rates have gone up but KIBOR or Karachi inter-bank offered rate has also been rising.

Benchmark six-month KIBOR has gone up by 81 basis points so far during this month to close at 4.04 per cent on September 21 from 3.23 per cent at the end of August.

This increase in KIBOR will likely have a cyclical impact on overall interest rates structure because banks use it as a reference rate to price various types of commercial and industrial loans. Since the start of the new fiscal year on July 1, six-month KIBOR has risen by 107 basis points. At end-June it was at 2.97 per cent.