KARACHI, Feb 8: The spread between the value of the rupee traded against the dollar in the interbank market and open market has  widened, which is a grave concern according to analysts because it depicts expectations that further depreciation of the local unit is anticipated.

The rupee in the interbank to the dollar was traded at Rs97.85 on Friday while in the open market it was exchanged at as high as Rs99.85, reflecting a spread of Rs1.90, compared to previous few years, where the spread has been just 50 paisa or less.

“Spread increasing is a dangerous sign,” said Sayem Ali, economist at Standard Chartered Bank.

“It reflects what the IMF has been saying that the rupee is overvalued and there should be a five to 10 per cent correction in the exchange rate.”

The central bank’s reserves stood at $8.58 billion in week ended Feb 1, much less than even two months of import cover and analysts said that is what is creating some uneasiness in the open market but interbank rates have managed to stay steady because of State Bank’s intervention.

According to the State Bank it has been aggressively defending the rupee in the interbank market, which is one of the reasons for the widening spreads.

“Volatility in the foreign exchange market can have implications for the inflation outlook due to potential feedback from exchange rate changes under prevailing conditions. This is why the SBP has intervened in the foreign exchange market in a calibrated manner to ensure its smooth functioning. It is important to remember that only a consistent increase in foreign exchange can ensure stability in the market,” the State Bank said in its monetary policy statement on Friday.

An analyst, who requested anonymity, says it’s a losing battle and at end of the day fundamentals will prevail and sooner or later, it will be reflected in the interbank market.

Pakistan is also due to make a repayment to the IMF of over $500 million this month which is expected to add pressure on the rupee, amid lack of external inflows.

The rupee already shed almost 9 per cent in 2012.

The State Bank has been intervening in the interbank to prop up the rupee, upon the instructions of the government which may not want it to hit Rs100 against the dollar, or hit triple digits in their tenure.

“But the State Bank has limited ammunition and as soon as the government goes, the currency will devalue,” said the analyst. One of the consequences of widening spreads between the open market and the interbank market is that overseas Pakistanis then prefer to send their remittances in the open market as they get more value for their dollars. “Whenever the open market increases and the interbank does not keep pace, you see remittances move out of the formal channels into the open market, which takes out liquidity of the banks,” said Ali from SCB. Pakistan relies heavily on remittances from overseas Pakistanis as there has been a lack of external aid and it has to meet its debt obligations. Overseas Pakistani workers remitted an amount of $7,116.70 million in the first half (July–December) of the 2012-13, showing a growth of 12.51 per cent or $791.36 million when compared with $6,325.34 million received during the same period of last fiscal year.