Perturbed over speculative attacks on the rupee, the central bank tightened on December 21 the rules for forward sale of dollars to importers. It helped the rupee recover a part of its lost value against the dollar.
The rupee that had hit the rock bottom at 90.02 per dollar regained 70 paisa and closed at 89.13 a dollar on December 23. “As soon as the market came to know about the SBP decision (of linking sale of forward dollars with actual maturity of import letters of credit) speculative dollar buying stopped and the rupee began to recover,” said treasurer of a local commercial bank.
On March 22 this year the central bank had lifted a three-year ban on selling of forward cover to importers. “But taking advantage of this facility some over-smart bankers were indulging in unchecked forward dollar selling to importers. They used to do it whenever there was a genuinely high demand for dollars, as was the case this month due to external debt servicing. That was why the central bank had to put some restrictions on forward cover facility,” explained treasurer of another bank.
“Maturity of forward cover should coincide with the maturity of underlying (import) letter of credit,” the SBP warned bankers on December 21. It also made it clear that in case of import LCs of more than 12 months “the tenor of the forward cover facility would be 12 months on roll over basis or the remaining tenor of the LCs—whichever is less.”
Senior bankers said unlike in the past the central bank made no attempt to cool off the pro-dollar sentiments through direct selling of foreign exchange into the market. SBP Governor Dr Yaseen Anwar had said earlier that SBP wanted the market forces to determine the exchange rate movements.
“That was one reason why we didn’t see any intervention,” remarked chief foreign exchange dealer at a foreign bank. But bankers cite two other factors that were possibly behind SBP’s non-intervention policy.
“First, the central bank wanted to keep exports competitive through a weaker rupee as this is exactly what India has been doing lately. And secondly, falling forex reserves have not left any room for intervention anyway,” said one treasury official at a large local bank.
Bankers say that since the end-quarter external debt servicing is almost over now and stricter rules on forward cover have become operative the rupee may remain stable in next few weeks. They say that a decline witnessed after December 21 in one-week, two-week and one-month forward premiums was quite a strong reason for this optimism.
Meanwhile, private sector borrowing from banks that remained negative during the first quarter of this fiscal year has accelerated in the second quarter and the circumstances surrounding this development suggest that domestic economy is expanding reasonably.
Between July 1 and December 9 of this year banks lent Rs75.6 billion to the private sector as against Rs72 billion in the year-ago period.
“Average cotton prices this year are far lower than in the last year and sugarcane crushing has also started a bit late. If private sector borrowing is rising rapidly, despite these constraints, it means that trading and industrial activity has really picked up,” remarked head of a local commercial bank. He attributed higher off-take of private sector credit to a strong 3.6 per cent growth in large-scale manufacturing, pickup in consumer finance and easing of interest rates. “More importantly, businesses are now retiring old loans at a much slower pace than during the first quarter.”
Local cotton prices are currently hovering around Rs5250 per 40kg—almost 50 per cent down from the levels seen in the year-ago period. This has cut the purchasing cost of ginners and textile millers and that, in turn, has reduced their off-take of credit from commercial banks.
But bankers say as sugarcane crushing has now picked up pace private sector borrowing would continue to rise. They also say that after a deliberate slowdown in cotton buying by textile millers to force the prices further down they too have accelerated buying thus contributing to expansion in private sector credit.
During the second quarter of the current fiscal year banks have focused on consumer loans as well and one large local and one top-tier foreign bank are still involved in aggressive marketing of their personal loans schemes. These schemes are designed for salaried people. Both schemes have credit ceilings—in case of the local bank’s scheme it is the equivalent of 15 monthly salaries of the credit seeker and in case of the foreign bank it is Rs2 million.
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