KARACHI, Nov 6: The US dollar fell below Rs60 in the inter-bank market on Saturday and lost 0.8 per cent value without any intervention from the State Bank to lift the rupee.

The rupee closed at 59.78 a dollar, up 47 paisa from Friday's close of 60.25, on higher inflow of dollars through exports and remittances from overseas Pakistanis amidst low demand, bankers told Dawn.

The rupee had lost 5.5 per cent value against the dollar in July-October but it started to recover from November 1 as SBP began to provide dollars for oil imports and tightened rules to check forex outflows.

The local unit has recovered 2.6 per cent during this week, rising to 60.78 a dollar from 61.36. It looks set to recover more if SBP continues to finance oil imports out of forex reserves and keeps tighter controls over foreign exchange market in place.

But as the trade deficit is growing too fast, keeping the rupee strong would require a substantial increase in foreign exchange inflows, through exports, foreign investment and workers' remittances or foreign exchange sent back home by overseas Pakistanis.

Bridging the gap between forex outflows and inflows by raising external debt through eurobonds and Islamic bonds makes sense for long-term external account management, but not for supporting the rupee for the time being.

Trade deficit in July-October this year rose to $1.432 billion on the back of higher oil prices and increased imports of oil and machinery etc., from $314 million a year earlier.

Imports surged by 37 per cent to $5.894 billion but exports grew by just 12 per cent to $4.462 billion during this period. In October 2004 alone, trade deficit soared to $591 million from $268 million in October 2003. Indications are that the trade deficit would rise at the same pace or even faster in the remaining eight months of this fiscal year pushing up the annual trade deficit to $4.2-$4.3 billion from the projected $3 billion.

Whether the central bank would be able to keep the rupee strong despite an additional trade deficit of $1.2-$1.3 billion, coupled with the government's external debt payments, provides a moot point for policy makers and financial market participants. Financing oil import bills and making interventions in the foreign exchange market using forex reserves would keep the rupee stable only for a limited period. SBP's forex reserves have already fallen from $10.073 billion at end-September to $9.778 billion at end-October 2004.

Even before it started paying for oil import bills from November 1, the central bank had been selling dollars in the inter-bank market to keep the rupee strong. Bankers close to SBP say the SBP sold slightly less than $1.4 billion in the inter-bank market in July-October 2004.

They say that a rapid fall in the rupee value in July-October followed by its dramatic rise this week has made it difficult for the market participants to make right projections about the exchange rates movements. But they also say that dollar buying by importers anticipating a fall in the rupee value is one of the factors that weaken the local unit.

One of the steps the SBP has taken to stabilize the rupee is that it has instructed banks to sell forward dollars to importers only against irrevocable letters of credit, and not against contracts. Heavy forward buying by importers against fake contracts used to create artificial demand for dollars thereby weakening the rupee.

OPEN MARKET: Money changers said the dollar closed at Rs60.20 for spot selling in the open market on Saturday, down from Rs60.70 on Friday, mirroring the fall of the US unit the in inter-bank market.